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Kenya's poll could fuel inflation

Dec 28 2012 17:13 Reuters

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Nairobi - Kenya's inflation eased for a 13th straight month in December as a rise in energy costs slowed, prompting economists to forecast an interest rate cut when the central bank meets in January.

But they said campaign spending ahead of a March 4 presidential election and rising oil prices were likely to halt the steady decline in inflation.

"For now I think it's possible to say it has bottomed out but it could be a few months before we see it ticking higher," said Dickson Magecha, a senior trader at Standard Chartered.

Year-on-year (y/y) inflation dropped to 3.20% from 3.25% in November, the state statistics office said on Friday. A Reuters survey of five economists had forecast inflation in a range of 3.25% to 4.00%.

The statistics office did not say why it had published the inflation number with three days of the month still to come. The data is collated in the second and third week of the month.

Jeremiah Kendagor, head of trading at Kenya Commercial Bank, said he expected the Monetary Policy Committee to cut the Central Bank Rate (CBR) by 100 basis points on January 10, while  Magecha and Mark Bohlund, a senior economist for IHS Global Insight, saw a cut of 200 basis points.

Inflation in east Africa's biggest economy peaked at just under 20% late last year as the country suffered a drought and the currency weakened, making imports dearer.

The central bank began a monetary easing cycle in July, taking its benchmark rate down 700 basis points over three policy meetings to 11%.

It has also been draining excess money supply, supporting the currency which has fallen 0.8% against the dollar this year.

"The most substantial upside risk to inflation is from a repeat of political violence around the elections, cutting transport links and encouraging hoarding of food and other necessities," said Bohlund.

Kendagor said he expected the central bank to continue its interventions in the money market.

The election will be keenly watched after the last presidential poll five years ago was disputed, leading to fighting in which some 1 200 people were killed, and some have said they fear a repeat of the violence.

Month-on-month inflation was 0.69% in December, the statistics office said.

Prices of housing, water, electricity, gas and other fuels rose 3.89%, slowing from 4.47%.

Food and non-alcoholic drink inflation, the biggest element in the basket of goods measured by the statistics office, edged down to 1.73% y/y from 1.74%in November.

Prices of staple maize and wheat flours, sugar and green grams fell y/y, the statistics office said.

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