Bloomberg News

Kenya Central Bank Says Power Rationing May Drag on Economy

August 01, 2011

(Updates with comment from Ndung’u starting in eighth paragraph.)

Aug. 1 (Bloomberg) -- Kenya’s central bank said scheduled power outages announced last week will curb growth in East Africa’s biggest economy, in explaining its surprise decision to stop raising the key interest rate last week.

“The recently introduced power rationing targeting manufacturing firms will create a further drag on economic recovery and supply of goods and services,” Central Bank of Kenya Governor Njuguna Ndung’u said in an e-mailed statement today from Nairobi, the capital.

Kenya Power Ltd., the country’s sole distributor, started scheduled outages on July 27 amid a shortage caused by machine breakdowns and a lack of infrastructure. The blackouts may last as long as three months, the company said.

Kenyan commercial lenders and businesses surveyed by the central bank said they expect economic growth to slow this year to “within the government target” of 5.3 percent, Ndung’u said today. The economy grew 5.6 percent last year.

Kenya’s central bank last week surprised financial markets by keeping its key lending rate unchanged at 6.25 percent, failing to stem currency weakness and raising concern among investors the bank is moving too slowly to contain rising consumer prices. The halt followed two increases in March and May totaling half a percentage point.

‘Tightening Intent’

“The markets were looking for a clear sign of their tightening intent,” Razia Khan, head of African economic research for Standard Chartered Bank Ltd. in London, said on July 27. “They have not delivered this, having failed market expectations of further central bank rate tightening.”

Inflation quickened for the ninth straight month in July to 15.53 percent on surging food costs amid drought and higher prices for imported fuels, the Kenya National Bureau of Statistics said today.

Stripping out the “volatile” categories of food and fuel from the consumer-price basket, inflation advanced 6.5 percent in July, from 5.6 percent in June, which is within the government’s target range, Ndung’u said. These types of goods account for 37 percent of expenditure and 54 percent of the inflation measure.

Inflation isn’t “overheating,” Ndung’u told reporters in Nairobi. “When we remove those volatile components that are reacting to supply constraints we don’t see massive inflation or any significant jump.”

The shilling has weakened 0.8 percent against the dollar since last week’s interest-rate decision, having lost 11 percent of its value since January when inflation surpassed the government’s 5 percent goal and accelerated every month since.

The central bank’s analysis of inflation showed that most of the 12 industries that are surveyed by the national statistics agency to compute consumer inflation have “strong peaks and troughs rather than trends,” Ndung’u said. “This cyclical behaviour could be expected to continue in the future, moderating the current high inflation rates.”

He declined to provide a specific inflation forecast.

--Editors: Paul Richardson, Karl Maier, Gordon Bell

To contact the reporter on this story: Sarah McGregor in London at smcgregor5@bloomberg.net.

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net.


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