In a surprise move, the Central Bank of Kenya raised its benchmark interest rate by 200 basis points to 12.5 percent, the largest rate increase since 2011, amid efforts to stabilise the country’s struggling currency.
The move by the CBK bucks the trend of top African central banks from Nigeria to South Africa, all of whom have recently hit the brakes on rate increases.
Ghana’s central bank held its rate steady at 30 percent for the second consecutive meeting while Uganda and South Africa also held their interest rates at 9.5 percent and 8.25 percent respectively.
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Nigeria did not hold its scheduled meeting last month but has left its benchmark interest rate at 18.75 percent.
The CBK governor Kamau Thugge said the MPC concluded that there is a need to adjust the monetary policy stance to address the pressures on the exchange rate and mitigate second-round effects including from global prices.
The shilling has weakened by almost 20 percent against the dollar so far this year, making it one of the worst-performing currencies in Africa as investors balked at the potential repayment of a $2 billion Eurobond in June, Bloomberg reported.
The weakness has been despite additional financial support from the International Monetary Fund, which last month granted staff-level approval for an additional $938 million to bolster the East African nation’s reserves.
He said Kenya expects $1.25 billion to $1.5 billion from the World Bank, alongside as much as $500 million from the Regional Trade and Development Bank.
“We will be getting a lot of external financing in the second half of the financial year,” he said. “So we should be able to reduce domestic borrowing quite significantly.”
“Once we get the external financing, and also in particular the IMF funding in January, that would be liquidity into the system and that will reduce our domestic borrowing significantly,” Thugge said at a briefing following the interest rate announcement. “We are also getting some money from the World Bank Development Policy Operation, and all these amounts will help deal with the issue of the Eurobonds.”
Kenya’s consumer price inflation slowed to 6.8 percent in November from 6.9 percent the prior month. Still, the cost of imported food staples, as well as crucial commodities like oil, have become more expensive because of the strength of the dollar.
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The MPC noted that “exchange rate depreciation continues to exert upward pressure on domestic prices, thereby increasing the cost of living and reducing purchasing power.” It judged that currency weakness had contributed about 3 percentage points — or almost half — of November’s rise in prices.
