UPDATE 1-Kenyan energy price rises muddy rate cut decision

Wed Mar 14, 2012 12:29pm EDT

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NAIROBI, March 14 (Reuters) - Kenya's energy regulator warned on Wednesday it may raise energy prices in the coming months after lifting the cost of petrol and kerosene for the first time since November, complicating the central bank's decision on when to cut interest rates.

Fuel prices can have a significant impact on inflation in east Africa's biggest economy and price reductions in the previous three months for diesel, petrol and kerosene have helped ease inflationary pressures.

The year-on-year inflation rate fell by more than expected in February to 16.7 percent from 18.3 percent in January, though the central bank kept its benchmark lending rate at 18 percent this month, warning of inflation risks.

While analysts expect the next move in interest rates to be down, some said the central bank would want to see a sustained downward shift in inflation before signalling the start of an easing cycle.

Analysts said Kenya's growth and inflation outlook would be closely linked to its March-May rains, which if plentiful would lower food and energy prices, while fuel costs could swing on geo-political tensions over Iran.

"The journey lower in the inflation rate is going to be sticky," said independent analyst Aly Khan Satchu. "The price of fuel represents a brutal, high-beta exogenous risk to the economy. A strong shilling is the wisest policy response."

Following Wednesday's price rise announcement, the cost of premium petrol in the capital Nairobi will rise 0.37 shillings to 111.69 shillings ($1.35) per litre from Thursday and kerosene will increase 0.47 percent. The price of diesel, however, was trimmed by 0.16 percent.

"In the last several months, there has been a general upward trend in the price of crude and refined petroleum products in the international market," the Energy Regulatory Commission said on Wednesday in its regular monthly review of pump prices.

"This may have a negative impact in subsequent price reviews," it said.

Kenya's economy is highly dependent on diesel for transport, power production and agriculture, while kerosene is used by many households to fuel stoves and lamps.

Transport costs fell 0.91 percent in February from a month earlier, thanks to previous fuel price cuts by the energy regulator, slashing the year-on-year inflation rate for the sector to 15.89 percent from 22.42 percent in January.

Transport accounts for 8.7 percent of the basket of goods used to calculate inflation. ($1 = 82.4500 Kenyan shillings) (Reporting by David Clarke; Editing by Richard Lough)

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