I agree with what most of you have said here:

The inflation we are facing is supply driven rather than deman driven.

Accordingly, the CBK Governor & MPC were correct when they declined to increase rates earlier in the year - since adjusting interest rates would not affect kinks in the supply eg weather, drought, oil etc. After all, even if CBK increased rates to 50%, does it mean I will adjust my eating habits and be eating once every three days? Or that i won't travel to work in CBD?

But then why is CBK acting now? Is it wrong?

Again, as many have pointed out before, the supply shocks can only be solved through fiscal policy/govt intervention eg maintain a strategic grain reserve, improve agricultural efficiency, reduce the current account deficit (why do we import t-shirts, bottled water, furniture, tissue paper, even potatoes for making chips at KFC?)

We all know making these decisions requires a well thought out plan & implement it accordingly.

Unfortunately for us, the people in govt who we elected do not have the luxury of time to start making these plans now & implement them when voters are crying aloud about circa 20% inflation.

So the politicians have to look for a scapegoat who can take the flak. And here is where CBK got caught.

CBK could of course have insisted that they would not increase rates - but then everyone in MPC & the governor are political appointees. It is did not pass my attention that prior to this MPC meeting, the executive appointed a deputy CBK governor who came from treasury.
In short, i would say MPC had no choice.

But all these points to a faulty political system. Let me elaborate.

Our role models in monetary policy (US, UK, Canada, France, Japan etc) tend to have better thought out plans (fiscal & monetary) which also run for longer than ours which can turn on their heads in 6months. Why?

At presidential elections in the US, only one third of senators are up for election. Only about half of governors are up for election.

In the UK, even during the most close elections, the Queen holds the country together. Same for the Governor in Canada & the royals in Japan.

In france, presidential elections do not always coincide with parliamentary elections.

These safeguards means that in these countries, there's someone in authority who can afford to look beyond the election cycle & who the technocrats can look for support so as to sustain unpopular but necessary measures.

But in Kenya, every single office is up for grabs during election - president, ministers, MPs, councillors, governors, women MPs...all of them.

Which means that as we approach elections, every elected official is looking at what can get him back into office or protect his interests. No one is left watching the shop when elections approach.

Until we change this, we shall ways be having 3 year plans & 2 years of firefighting. 3 years of good planning after elections and 2 yrs of firefighting when elections approach.

Which is why i'm not surprised CBK had to do what it did.

And why i will not be surprised when the City Council allows hawkers right into CBD sometime next year ...and traffic police stop bothering with matatus.

I think the CBK did not have any other option given the circumstances and facts.

1) Due to mainly external factors (uprising in North Africa, economic crisis in Europe)....there was UNCERTAINTY in the world markets. When this happens every player runs for the Yen, the swiss franc and the dollar.

2) High demand for the dollar meant that all net importer countries will be adversely affected as they have to compete for the dollars with everyone else and yet they do not have much dollar proceeds as net importers. That is where Kenya is. We are importing goods worth $900B and exporting $400B per year. The result is we have to cough more shillings to buy the same dollar required by all other countries.

3) Our inflation has been caused mainly by the appreciation of the dollar against the shilling. Of course we had more than normal demand for dollars due to drought and other production factors and we had to buy food.

4) Government had to get the huge suppliers of dollars to send dollars here. This was to be done by either

i) Increasing exports ...(This is hard.... how do you increase your tea or coffee production overnight? or even bring more tourists?..... NOT POSSIBLE

ii) borrowing dollars to increase dollar supply in the country. This is what the govt has done.....borrow from IMF but this is limited supply....also with strings attached.

5) killing 2 birds with one stone: but with consequences:
CBK had one tool to deal with inflation but also address the exchange rate. i.e. Raising the interest rate.... how does it work?

i) raising the interest rates will attract international investors....where else can they earn above 15% pa?.....so they will bring their dollars and buy kshs to earn 15%....this will result in high dollar supply....since we cannot sell more coffee, tea, etc now...we would rather sell kshs...at interest...lol

ii) At 15% and above interest rates most banks, individuals and investors will take their money to Prof Ndungu to keep for them. so eventually no one will have any money on them.....and so you cannot go round buying land and other things at any price you like as you have no money....or you have to wait until prof Ndungu gives it back to you..... that way INFLATION IS KILLED.

If you were the signatory of the Kenya shilling notes what would you do?

That why I think the bull in the stock market is short lived.Why take a risk while you can get 15% Risk free investment elsewhere.

The focus was on infrastructure from 2008 onwards... building it through public spending. Because we failed to do the Eurobond in 2007 (under Kimunya) the only recourse was to fund the current account with IMF funds. Don't you agree?

I like to ask simple logical questions which require similar simple logical answers.

- What is the current US federal reserve rate?
- does it ever go to 16.5%?
- has the federal chairman ever increased his rates by 9.5% in a span of 30 days?

I could ask the same questions about any other developed or well managed economy.

So why is our good old prof/gava taking this illogical route.

Is it that in Kenya the gava never ever considers our plans?

Why can't simple deppreciation of the kenya shilling price people out of imported goods and lead to a slow down in demand.

how farther down does prof. Ndung'u expect to reduce the rate of inflation by hiking the CBR rate to 16.5% from 11%?

Jedi Knight: Why can’t a simple depreciation work? Yoda: Because we passed that stage long ago

We’re not like the US in that we can’t borrow tonnes of money merely because we hold the global reserve currency. And if you borrow somebody else’s money you’d rather pay them 0%, so US Fed can’t raise Fed rate to 16.5% because they’d default. I recently read a book called “Bailouts or Bail-Ins” written by a chap called Nouriel Roubini and documents how governments handled crisis (in places like Mexico, Argentina, Russia and Far East Asia).

The chapter on Exchange Rate Crises and Capital Controls says the following “The government has four basic options to reequilibrate demand for domestic and foreign assets. First, the sovereign can let the exchange rate fail-with potentially devastating consequences for those who have borrowed in foreign currency. Second, the sovereign can intervene in the foreign exchange market, by selling either its reserves or domestic debt denominated in foreign currency. Third, the Central Bank can raise short-term interest rates to make domestic currency-denominated financial assets more attractive than foreign assets (assuming that domestic debtors can afford to pay the higher interest rates). Finally, the government can impose capital and exchange controls that prohibit the purchase of foreign exchange with domestic financial assets”.

I s**t you not but that’s exactly what it says on page 228. To recap what we’ve gone through this year.

Governor let exchange rate fall by doing nothing, imports remain unchanged and the currency tanked. He knew we were heading into a crisis that’s why we discussed the ECF (for BOP support) as early as November 2010. He knew that the record fiscal budget deficits in 2010 and 2011 are dangerous but only if a private sector boom begins. So he started sell fx reserves but wouldn’t tell peeps how much… cos he didn’t much to sell. Then talked about issuing a Eurobond (guys knew he was bluffing). So he started to raise Tbill rates but even that wasn’t enough to go long KES… he could pay for the higher interest rates by rejecting long end bond bids but accepting high short yield bids. Then in his frustration he imposed stricter controls on foreign fx flows, to basically make it harder for guys to fund their positions.

All in all, everything short of capital controls has been tried. The only next logical step to contract economic growth with higher interest rates to attract savings (dollar inflows). That’s how most overvalued currency are defended.

i dont agree the SSF wasnt even for budgetary support, why must we keep running unnecessary deficits??

i see your point.

More shocks for banks

http://af.reuters.com/ar...ws/idAFJOE7A20JY20111103