Kenya, Uganda inflation falls point to more rate cuts

Inflation rates in Kenya and Uganda fell in October, helped by easing food prices, creating room for further interest rate cuts to spur growth in east Africa's number one and three economies.

Inflation has tumbled across east Africa's main economies this year after central banks slammed on the monetary brakes in the second half of 2011 to curb runaway prices that were driven by soaring food and fuel costs and ailing local currencies.

With inflation now below target in both Kenya and Uganda, there is growing pressure on policymakers to turn their attention to growth, which has been dampened by the huge cost of credit after rate hikes. Both Nairobi and Kampala, however, will be mindful of their fragile currencies.

Kenya's headline inflation rate fell more than expected to 4.14 percent in October from 5.32 percent the previous month. In Uganda, inflation slowed to 4.5 percent from a revised 5.5 percent in September.

In both countries, the rates were driven lower by food price rises which fell 2.5 percent over the 12-month period in Uganda, while in Kenya they rose at a slower rate than in September.

"(In Kenya) although the gap between the policy rate and inflation, which we think will decelerate a touch more before it turns, certainly supports an outsized rate cut, we would still advise some caution, and a measured, drawn-out easing cycle over time," said Razia Khan, head of research for Africa at Standard Chartered in London.

Last week, the International Monetary Fund warned Kenya to watch out for inflationary pressures that may emerge if global food prices should rise further. While global prices of some grains are higher, they are still lower than 2008 record levels.

"The central bank, I think, should be reducing the Central Bank Rate (CBR) because the spread between the CBR and the inflation rate remains extreme and one of the highest in the world. However, the data is confirming the trough in the inflation rate is no longer somewhere over the horizon," said Aly Khan Satchu, a Nairobi-based independent trader and analyst.

CURRENCY CONCERNS

Kenya, which ramped up its benchmark lending rate to a high of 18 percent last year to contain rampant inflation that peaked at 20 percent last November, has cut its key lending rate by a total 5 percentage points since July to leave the rate at 13 percent.

Neighbouring Uganda's key lending rate also lies at 13 percent, after a total of 8 percentage points was lopped off. Market analysts said they expected the sixth straight monthly cut since June when the Bank of Uganda's Monetary Policy Committee meets on Friday.

"There is still room for more easing," Standard Chartered's Khan told Reuters.

"But having already reversed all of last year's 1000 basis points of tightening, further easing should take place at a more measured pace," she said.

Faisal Bukenya, head of market making at Barclays Bank Uganda, agreed but said the central bank would be wary of hurting the shilling, which is down 4.4 percent against the dollar in the year-to-date.

In Uganda, the core rate of inflation, which excludes food crops, fuel, electricity and metered water, dropped to 4.0 percent from a revised 4.9 percent in September.

The central Bank of Uganda said this month any further cuts to the rate in 2012 were likely to be small unless there was a major drop in inflation and aggregate demand.

Another rate cut in Uganda might undermine the recent recovery in government bond yields. Uganda's 91-day Treasury bill fetched a weighted average yield of 9.688 percent, matching the last sale and up from a 2012 low of 9.656 percent on Oct 3. Yields on the 182- and 364-day bills rose sharply.

"Bank of Uganda wants to extend its easing cycle but they are also mindful that it has risks especially on undermining yields," Peter Mboowa, trader at KCB Uganda.

 

By George Obulutsa and Elias Biryabarema

NAIROBI/KAMPALA (Reuters)