NAIROBI, Jan 26 (Reuters) – Kenya’s year-on-year rate of inflation is expected to maintain a downward trend in January as food and fuel price pressures ease and the effect of months of monetary tightening reflects in a stronger shilling.

People shop at Nakumatt supermarket Nairobi January 5, 2011. REUTERS/Noor Khamis

All eight analysts polled by Reuters said the rate would come down from 18.93 percent in December, as the impact of past rate rises filters through the market. Inflation rose for 13 consecutive months to peak at 19.72 percent in November.

The shilling, one of the worst performing currencies last year, rebounded strongly after a series of rate rises that surpassed market expectations in the second half of 2011.

The shilling closed 2011 down 4.8 percent against the dollar after recovering about 20 percent of its value having hit an all-time low of 107 in October. Its rally reduced imported inflation.

The Central Bank of Kenya left its key benchmark rate at 18 percent earlier this month.

In a bid to keep the shilling on an even keel, the central bank has so far this year absorbed about 26 billion shillings through regular repos and sold hard currency to commercial banks.

“Thanks to base effects, a recovery in the shilling, tight domestic liquidity and improving weather, we believe that year-on-year inflation in Kenya has topped out and that it will head progressively lower over the course of 2012,” Matthew Searle, sub-Saharan Africa analyst with Business Monitor International, said.

Searle, who predicted inflation would fall marginally to 18.5 percent in January, warned the market would be watching the central bank closely to see whether it would defend the shilling if it came under renewed pressure.

The central bank was heavily criticised for being too slow to respond to the shilling’s freefall for much of last year.

“At $3.8 billion or 3.4 months worth of import cover, the bank does not exactly possess a warchest of foreign exchange reserves with which to do the job,” Searle said.

The next Monetary Policy Committee meeting is due on Feb. 1.

The stronger shilling has allowed the energy regulator to cut the prices of petrol, diesel and kerosene, while good rainfall has improved harvests, easing food inflationary pressures. Nonetheless, east Africa’s biggest economy is still expected to import 67,500 tonnes of maize in the six months to June to boost its stocks.

While the maize imports are likely to put some pressure on the shilling, the Ministry of Agriculture says the resulting surplus will ease pressure on the price of the main staple food.

Kenya’s finance minister has pledged to cut inflation to 5 percent by 2014/15 (July June) fiscal year through austerity measures to reduce its budget deficit.

“Inflation is likely to slow to around 18 percent in January … as transport, utility, and clothing costs … moderate somewhat,” Angus Downie, fixed income and currency strategist at Ecobank, said.

By Yara Bayoumy, Reuters

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