@selah. A good article on factors that cause inflatio:- namely food and energy. These are the traditional factors that had made a big impact, but the change in inflation stats has sterlized the previous volatility.

But you have to look at the crude oil prices and current deficit for more evidence that imported inflation is low. The current deficit declined to US$792 mn or a 2.5% to GDP ratio (our best position for a number of years) thanks to lower imports, recovering exports and improved services. And compare that to US$2.64 bn deficit a year ago or a 8.5% to GDP. I think that's what's driving inflation down.

So this gives the CBK the confidence to lower interest rates even though M3 is growing at 26% (near Safcom IPO levels). Maybe the CBK believes the current of inflation is still too low, but wants to remain cautious by mopping up liquidity through the 31bn bond. They know there's a dislocation between raising funds and spending and may use that to regulate the money supply more efficiently.

But the fact is that credit to the private and public sector have traditionally had an inverse relationship, where one is substituted for another. Looking at correlation the last few months has shown that relationship no longer exists as govt is still borrowing (crowding out the private sector). This is counterproductive to the recent moves to lower lending rates and thus the policy is ineffective. Household lending is still growing too slow, the economy is govt expenditure driven and not highly influenced by domestic investment. So inflation could rise if govt spending filters to ordinary folk, but it isn't, is it?

Read more:

http://www.businessdaily...0/-/j3sycmz/-/index.html

They have a serious baby boomer problem looking for benefits in only a few years. Chris Martenson did a few educational videos on the subject.

http://www.youtube.com/w...cWs&feature=related
http://www.youtube.com/w...BVE&feature=channel

But another analysts said the reason for lower interest rates (or why they must be kept at zero) is that the Fed borrowed short term to finance its deficits (versus long term paper) and thus the average maturity on their debt is like 4 years. Compare that to Kenya whose been financing it's deficits with increasingly longer paper. The average maturity has risen from 3.5 years to 6.3 years in just under five years thanks to CBK lengthening the curve. This is the strategy the Fed is taking if you look at the latest FOMC (I think). They have a social, debt and demographic problem.

One starts to wonder how the 31.5 bn bond issue was oversubscribed? The latest weekly bulletin shows a surge in liquidity up 82.5% to 28 bn shortly before the auction date. I'm not sure when the value date was but it'll be interesting to see how this figure changes next week.

Interesting how that happened on 23rd August shortly before the auction. How does this happen? One day there are few reserves then the next massive rise in reserve money. Well we expected several T-bill/bond maturities but the decrease in govt deposits from 53.6 bn to 40.0 bn was probably the key reason. So that's how govt spends its borrowings these days or how policy is conducted. They spend money at the most opportune time to achieve their desired targets. Their target this time was to get full subscription and prob not based on a sudden need to fund a project. Using govt spending as a tool to lower rates.

Commercial bank clear accounts registered an increase from 18 bn to 26 bn. What do you expect the banks to do with all this liquidity? They're already risk averse toward normal lending; maybe offer them 7.2% risk free. I wonder where this puts public sector credit growth at, maybe up 70% y-o-y?

Download the latest weekly bulletin from the link below and check it out for yourself on pages 2-4.

http://www.centralbank.g...ublications/default.aspx

CBK publishes the correct figures for OMO. Click link below:

http://www.centralbank.g...2010/Sept/B03092010.pdf

Interesting movements in reserves on page 4 particularly on 30 August (value date). Perhaps confirms some of the issues we discussed in the previous post.

Kenyan interbank rate is at new low of 1.05%.