Interest Rates To Remain Unchanged

KUWAIT CITY, April 9

KFH-Research stated in its report that the inflation rate in Kuwait in February dropped to reach 2.1 percent, which is its lowest levels in four months, due to a slowdown in increase of food, shoes, and clothes prices. If the rates of rents, food and the housing sector continue to rise, they will be one of the most important factors that increase inflation during the coming period. The report added that the Central Bank of Kuwait's decision to lower interest rates by 50 points to reach 2 percent in October 2012, aims to cement the growth of the non-oil economy. As a result of that, banking sector loans for the private sector began to show signs of recovery, where it increased by 5 percent on an annual base as the end of 2012, compared to 1.6 percent by end of 2011.

This is the highest growth rate in three years, and most growth contributions were a result of personal and commercial loans. Kuwait's monthly consumer price index (CPI) based inflation moderated at the slowest pace in 4 months to 2.1 percent y-o-y in February 2013 from 2.3 percent y-o-y in January 2013 driven mainly by a slower increase in prices of food, clothing & footwear. On a monthly comparison, consumer prices in Kuwait registered a marginal increase of 0.1 percent m-o-m in February 2013 from a decline of -0.2 percent m-o-m in January 2013 on higher monthly inflation of education & medical services as well as other goods & services.


Further Moderation in Food Prices 
Food inflation, which accounts for 18.3 percent of the CPI basket, moderated at the slowest pace in 31/2 years to 0.8 percent y-o-y in February 2013 from 1.0 percent y-o-y in January 2013. Details showed weak food prices across sub-category. Prices of major sub-components such as meat, poultry & fish fell by 0.1 percent y-o-y, tea & coffee declined 0.9 percent y-o-y and oil & fats contracted 1.2 percent y-o-y, contributing to a further moderation in overall food prices and placing downward pressure on headline inflation.
The moderation in Kuwait's food prices were in line with the downward trend in global food prices in recent months. Global food prices were seen contracting since December 2011 due to lower freight prices and surplus production especially of rice and sugar. Latest data in February 2013 showed that global food prices continued to decline by -2.5 percent y-o-y after falling -1.1 percent in January 2013. However, with the global food market projected to experience a tighter demand and supply balance in 2013 as indicated by the Food & Agriculture Organisation (FAO), global food prices may be a source of upward inflationary pressure going forward.


Upward 
Meanwhile, the price inflation for clothing & footwear decelerated to 2.0 percent y-o-y in February 2013 from 3.4 percent y-o-y in January 2013 mainly driven by lower prices of readymade garments which are mostly determined by international factors (clothing and footwear being primarily imports), rather than local ones. Clothing and footwear prices have been a source of upward pressure on headline inflation for most of last year but have seen a sharp moderation in early 2013. 
The housing & utilities segment (the largest component accounting for 26.7 percent of the CPI basket), was sustained at 2.4 percent y-o-y in February 2013, similar to the previous month. Housing rents, which dominate almost 95 percent of the broader housing & utilities segment, continue to remain stable as its prices are only adjusted once every three months. However, with property demand soaring in Kuwait, we envisage rental inflation to be a source of upward pressure in the future.
 

Mitigating further decline in headline inflation were the prices of household goods & services segment (weighted at 14.7 percent of CPI basket), which rose by 3.5 percent y-o-y from 3.0 percent y-o-y previously. The gain was due to a sharp jump in domestic services' prices -- a sub-component that had remained unchanged throughout 2011 and 2012. Meanwhile, transport inflation (accounts for 16.1 percent of CPI basket) inched up to 3.1 percent y-o-y in February 2013 from 2.9 percent y-o-y in January 2013 mainly due to higher vehicle prices and airline fares.
Looking ahead, we retain our forecast for Kuwait's inflation rate to remain at a manageable level of 3.0 percent -- 4.0 percent for 2013-2014 as food inflation is expected to remain modest at least for 1H13 before picking up in 2H13 amidst an environment of tighter global food supply as projected by the FAO. However, the government's price control measures on fuel and food items through an extensive subsidy system will likely prevent a drastic rise in inflation for Kuwait. Meanwhile, soaring demand for property in Kuwait may bolster the housing segment and place upward pressure on headline inflation going forward.


In general, we forecast Kuwaiti interest rates to remain unchanged at 2.0 percent for 2013 and 2014 as monetary policy generally tracks those set by the US Federal Reserve due to the Kuwaiti dinar (KWD) being pegged to the US dollar (USD), which makes up the bulk of the undisclosed, trade-weighted basket of currencies. Based on its latest monetary policy statement, the US Federal Reserve remains keen on maintaining its policy rates low at 0 percent-0.25 percent at least until mid-2015. 
Despite this, the Central Bank of Kuwait had surprised us with a rate cut of 50 basis points to 2.0 percent in early October 2012. The move, which came as inflation fell substantially, was aimed at boosting growth in the non-oil economy. As a result, bank lending to the private sector is beginning to show signs of improvement, expanding by 5.0 percent y-o-y as at end-2012 compared with around 1.6 percent in end-2011, the highest growth in 3 years, with growth contributed mainly from personal and trade loans.

© Arab Times 2013