The IMF is re-evaluating its stance on inflation targeting and re-examining the flaws in macro-policy thinking. Read more below

http://www.businessdaily...-/109lfvxz/-/index.html

The article mentions that in a recent paper IMF economists wrote in hindsight the "Higher average inflation, and thus higher nominal interest rates to start with, would have made it possible to cut interest rates more, thereby probably reducing the drop in output and the deterioration of fiscal positions"...the key word is hindsight...but in hindsight without the lower interest rates would the crisis have existed? The solution still proposed is the same cutting interest rates...

A rebuttal from can be taken from Elliott Wave writer Robert Prechter who makes the case for suffering the pains of an economic downturn instead of delaying it (delaying it by increasingly lowering interest rates). Read more on the link below where he gives us a better understanding of deflation using a car analogy.

http://www.elliottwave.c...First-Understand-It.aspx

In the last 4 months Kenya's inflation data has been re-calculated, re-composed, re-weighted and re-based to produce a highly unproductive figure with no historical reference. The (Feb-09) re-based CPI has no correlation with the previous ones (in terms of monthly changes) although the stats bureau director general has disclosed all the details on the new CPI. Check it out at www.knbs.go.ke.

The only info they have given us is overall 12-month inflation rate was 5.2% and annual average inflation was 9.3%. How is that useful? What was the rate in Feb 2009 or even Jan 2010? The previous CPI base was set for convenience at Oct-2005...largely pegged on food inflation...what was the justification for Feb-2009, well I guess it allows them to calculate inflation for 12 months. If the CBR was baseless for pegging lending rates what use is the new CPI for inflation targeting, if CBK perception of inflation is skewed.

What other tools does CBK have at it's disposal to manage rates? It's using open market operations to perfection, helping banks and bond traders make money. This week's CBK bulletin reveals a 10.8b cash injection on 1st March (the value date for the 3rd IFRB), effectively giving banks liquidity/leverage to bid 5.5b + 35b for the bill&bond auctions. To review the CBK's 10 month use of reverse repo to compliment the expansionary policy. Since May 2009 the CBK started pumping in cash reserves and the reserve repo rate has dropped 450bp from 7.0% to 2.5% while the 91-day T-bill has declined only 114bp from 7.38% to 6.24% (lovely arbitrage..."don't hate the banker, hate his banker").

Has this situation eased lending and interbank rates? Yes. But the interest rate spread has infact risen from 9.87% to 9.98% during the same period. So it's no wonder why BBK and SCBK are in bonds & curious how they expanded govt bonds in Q3 and Q4, even though the contraction of private sector credit took place in Feb 2009. Why didn't BBK make more money in 2009...becoz over 40% of its loan book is credit to private individuals (this can be seen in BBK's loan book dip in Q1). And why does Feb 2009 sound so familiar...the new base for the CPI. In Feb-2009, the old CPI and m-o-m overall inflation rose quickly at a time when the govt began to launch infrastructure bonds to cover for the drop in private sector credit. Why do I say private sector credit declined becoz y-o-y M1 declined by -6% in Feb-2009, which is the first time this has happened since 2001.

The household budget survey was done in 2005, the manual by the international labour organization was out long ago (becoz UG & TZ applied those standards long ago) and the inflation calc was changed in Oct-2009. Why didn't they re-base earlier like Dec-2008? Why launch the new CPI in Feb-2010? It's quite simple, using Feb-2009 as the base index makes 12m inflation appear lower, which is important for CBK to convince commercial banks to lower lending rates (since CBR has been ignored). To combat high lending rates CBK is lowering interest rates on its long term bonds...ARY on the 8 year IFRB dipped almost 300bp...this seems to be the best option given the circumstances.

The CBK may be happy that consumer credit is growing; however, the picture may not be so rosy for the manufacturers...the BD article mentioned "The Kenya Association of Manufacturers (KAM) reckons that there has been a drop in demand for goods of between 10 to 15 per cent in the past 18 months." The credit story for key sectors has changed with the only two categories recording negative y-o-y growth being manufacturing down 6% and business services down 9%.

However, as Housing Finance and S&L can attest to, there's robust lending to the real estate sector-in fact it's the best performing category after trade with y-o-y loans growing by 37% or Sh13.6 billion. A interesting statistic to look at here may by the value of buildings approved by Nairobi City Council. It's grown 103% (100% deflated) to Sh78 billion in the nine months of 2009. But the best trend to chart is the ratio of residential to non-residential building plans. Let's have a closer look at the ratios below:

Year - Residential / Non-Residential

2005 - 56% / 44%
2006 - 64% / 36%
2007 - 59% / 41%
2008 - 55% / 45%
2009 - 47% / 53%

The trend above shows a move toward non residential properties in Nairobi, comprising 53% of all plans vs 44% in 2005, but will the city experience a glut in office space...many top property managers are beginning to see higher vacancy rates and considering the huge loans taken out to fund these projects, are the owners of these properties looking at high interest charges as they try to chase down new tenants?

CBR rate adjusted downwards by 25bp to 6.75% from 7.00%. CBK believes inflation not a threat, monetary policy stance aims to stimulate the supply of credit to support economic growth and CBR is a good signaling tool.

Read more below:

http://www.centralbank.g...ds/mpc/MPC023032010.pdf

Inflation doesn't seem to be a threat, then they shud re-base the CPI index to Feb 2008 so we can get 12 months of proper annual inflation data to confirm that assertion. Policy stance aims to stimulate supply of credit...to who govt or private sector? Govt seems to be hoarding it, but who will have the capacity to grow the economy? CBK itself in Feb said that banks aren't responding to the CBR, what's changed now?

Some interesting parts in the MPC statement

The MPC market survey indicated that inflation was no longer a significant determinant of the interest rate structure but that the cost of funds and credit risk were major constraints to credit supply. However, these constraints had been easing over time.

The committee perceived that credit expansion to critical sectors of the economy, was closely linked to the growth of those sectors and that the economy's growth path would be best served by a lower cost of credit.

Inflation, insignificant...how high does inflation have to be to be significant? Credit expansion is linked to sector growth...sounds true, but household credit doesn't seem to have improved much...maybe that's the reason there's low inflation.

What did the Nigerians do? Read more below:

http://www.cenbank.org/O...overnor%27s%20Speech.pdf

Wa_ithaka. I don't have much experience in credit scoring, but do you think we could get a system similar to the US one? I have relatives in the US who are always telling me about how hard it is to maintain good credit scores. I wonder if they'll be that strict here.

For me the bd story at least represents more democratic fiscal policy from cbk, he also seems to have taken up the vogue pschology in economics style. Wazungu like it, take position.

The statistics bureau released new stats for inflation. The rate dipped in March to 4%, and was largely expected given the rainfall. Read more:

http://www.knbs.go.ke/

We have so far covered this in previous posts 63, 64. One thing for sure the new CPI has no correlation to the previous CPI (irrespective of the base or calculation) and this can be confirmed by looking at the changes between Feb-09 and Sep-09. If we can use some sort of stock index analogy to view the new inflation series, we can say it is the equivalent of changing the base year to 2010, the no. of constituent counters to 25, the weighting to price weighted (vs equal) and recomposing the index to include stocks that belong to undeveloped sectors...maybe the last 1 wud be okay.

The CBK MPC statement in March mentioned that inflation is no longer significant in the interest rate structure and indeed the current rates are excellent to attract foreign investors and favourable reviews from IMF economists. Low inflation will raise GDP growth rates with current economic projections from IMF at 3% for 2010 against 2% in 2009. It is still important to keep track of inflation as debt productivity (ability to generate GDP from new debt creation) in 2008 and 2009 was low compared to the 2004-2007 period.

The statistics bureau is expected to release inflation figures soon and they are expected to remain low at 4% given falling power costs, etc. A reliable source says that the CBK governor also questions the figures being churned out, in fact it has confused him so much as to make him say that's no longer relevant to the interest rate structure.

But during the last auction several bankers theorized that the T-bill would probably hit bottom at 4.4%. Why that level? It seems rather arbitrary, to say that there's no relationship but then place short term rates just above the rate of inflation.

We are not the only ones that have questioned inflation stats before. Even economists and financial experts in developed market like US are always skeptical of changes in methodology. US Cultural Economist, Ronald R. Cooke, wrote at article "US CPI Inflation Statistics Manipulation and Deception?" in 2007. However, the US situation is different from ours.

"First of all, although the CPI is called a consumer price index, it is NOT a price index. To quote the BLS: “… the CPI focuses on approximating a cost-of-living index not a general price index.” Although originally introduced in 1978 to measure price changes, the CPI was changed to a “buying habits” index during the Clinton Administration. It no longer measures price change. It is not even a good measure of the cost of living."

http://www.marketoracle.co.uk/Article3135.html

May 1 was an important day for most labours in Kenya given the 10% increase they received on their minimum wage. This is good considering annual average inflation is estimated at 7.03% for March 2010 (although looking at the CBK and KNBS website, I haven't a clue whether it's headline or core or whatever). If we focus on the wage bill we take the inflation debate further. Low inflation makes all people happy- better returns for investors, a lower rise in the corporate wage bills, reduced govt budgeted expenditures, etc...

The statistics bureau categorizes the population into different income groups:- Lower, Middle & Upper. The lower income band is a good group to focus on because they comprise the largest population whose income grows slower than the rest. In fact the CIA World Factbook further estimates that the household income growth for the poorest 10% of the Kenyan population is 1.8% versus household income growth of 37.8% for the richest 10% of the Kenyan population.

So have inflationary pressures impacted household incomes? The changes in household incomes according to household surveys between 1957 and 2005 are below:

Year: Lower income band household income

1957: 350
1969: 400
1974: 699
1986: 2,000
1997: 10,000
2005: 23,671

Since 1986 the growth in income has virtually doubled every 10 years, so What will it be in 2015? What caused exponential increase in household incomes for the lower income band? The average % rise in household income is below:

Year: Annual growth in lower band household income

1969: 1%
1974: 12%
1986: 9%
1997: 16%
2005: 11%

Between 1997 and 2005 inflation average annual inflation was ~8% vs 11% growth in household income. Was this 11% y-o-y growth in income due to economic growth? History shows that the period between 1997 and 2005 was not particularly prosperous for the country. Considering the effects the commodity boom has had on inflation since then how fast would incomes have to grow by 2015? Subduing inflation therefore should be the priority for every government and I'd say we're doing a pretty good job.

As soon as they manufactured a new inflation number last yr, I stopped following the announcements. I just follow the rainfall patterns and I can tell if inflation is up or down...