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data has been re-calculated, re-composed, re-weighted and re-based to produce a highly unproductive figure with no historical reference.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.