UPDATE 2-Kenyan, Ugandan inflation point to interest rates on hold

Thu Feb 28, 2013 8:26am EST

Related Topics

* Kenyan inflation quickens faster than expected

* Ugandan inflation rate hits 26-month low (Wraps Kenyan, Ugandan inflation, adds analysts)

By Richard Lough

NAIROBI, Feb 28 (Reuters) - Kenyan inflation quickened faster than expected in February, data showed on Thursday, raising expectation policymakers will leave the central bank rate (CBR) unchanged in March.

Headline inflation in neighbouring Uganda fell to its lowest level in 26 months but underlying inflation was still above target.

Where inflation in Kenya heads in the near term will depend largely on whether next Monday's tight presidential election is peaceful or unleashes a repeat of the weeks-long nationwide violence that followed a disputed vote in 2007.

The markets appear optimistic. Kenya's shilling rose to its highest level so far this year on Thursday as investors bet on a smooth handover of power.

The stock market in east Africa's biggest economy is also up more than 9 percent in 2013.

Consumer prices in Kenya rose 0.7 percent in February, driven by a 1.29 percent rise in food and non-alcoholic beverage costs and pushing the year-on-year rate of inflation to 4.45 percent.

"Inflation is ticking up, interest rates are ticking up and the CBR is at 9.5 percent. It's a phase where the central bank will pause," said Ignatius Chicha, head of treasury at Citi in Kenya, referring to the policy rate.

While a rate hold might be most prudent, a small cut could not be ruled out given "the still depressed economic outlook," said Mark Bohlund, senior economist for sub-Saharan Africa at IHS Global Insight.

A Reuters poll of 11 analysts and traders had given a median forecast for inflation to accelerate to 4.30 percent. The government's medium-term target for inflation is 5 percent, plus or minus two percentage points.

Inflation in Kenya peaked at just under 20 percent in late 2011 then fell steadily to 3.20 percent last December, helped by tighter monetary policy and lower food prices.

However, inflation bottomed out in January and election campaign spending combined with a weaker shilling had been seen pushing the rate up in February.

EYES ON VOTE

Aly Khan Satchu, an independent economist in Nairobi, said February's rate reflected a "tsunami of election-related spending" across the country.

Kenya's two leading presidential candidates are expected to spend a combined $340 million, a record for Kenyan elections. Voters will also cast ballots in parliamentary and regional elections on March 4.

Violence however cannot be ruled out, diplomats and political analysts say, with rival alliances forged once again along ethnic divides. The last bout of post-election violence convulsed the economy and hammered the shilling, sending prices higher, before a political deal spurred a shilling rally.

Inflation data in May would give a clearer direction on the central bank's monetary policy direction, Citi's Chicha said.

In neighbouring Uganda, a 2 percent year-on-year fall in food prices helped slow headline inflation to 3.4 percent, its lowest level since December 2010.

However, the core rate of inflation, which excludes food crops, fuel, electricity and metered water, fell only marginally to 5.5 percent from 5.6 percent in January and was likely to keep trending above the central bank's 5 percent medium-term target.

"In spite of sluggish economic growth, the (central bank) will have limited scope to further stimulate the economy without further impairing its relatively short track record as an inflation-targeting central bank," Bohlund said. (Additional reporting by Beatrice Gachenge and Drazen Jorgic in Nairobi and Elias Biryabarema in Kampala; Writing by Richard Lough; Editing by Ruth Pitchford)

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