Bloomberg News

Kenya May Raise Rates to Steady Shilling, Renaissance Says

June 14, 2011

(Updates with comment from analyst in third paragraph.)

June 14 (Bloomberg) -- Kenya’s central bank may raise its benchmark rate as much as 1.25 percentage points by the end of the year to curb inflation and support the shilling, which hit the weakest in 17 years yesterday, Renaissance Capital said.

An increase to the key lending rate by as much as half a percentage point is “looming,” Yvonne Mhango, a Johannesburg- based economist with Renaissance, wrote in an e-mailed note to clients today. The central bank typically meets every two months to review monetary policy. Its next meeting is scheduled for July.

“The rhetoric of the Central Bank of Kenya has become more aggressive in the face of accelerating inflation and a weakening shilling,” Mhango said. “This follows the reluctant tightening of monetary policy in the first half of 2011.”

Kenya’s central bank has raised the key lending rate at its last two meetings in March and May, each time by a quarter of a percentage point, to 6.25 percent to cool inflation. It also increased the cash reserve ratio by the same margin to 4.75 percent to curb currency supply in the economy.

That followed an unexpected reduction to a record low of 5.75 percent in January, which is the same month that inflation rate surpassed the government’s 5 percent target. Price growth has accelerated for the past seven months to a 25-month high in May of 13 percent, as food and fuel prices surged.

Currency Performance

Kenya’s shilling reached 90 per dollar yesterday, its weakest level since March 1994, and will average 87 per dollar this year as rising yields attract foreign investors, softening the currency’s depreciation, Mhango said.

The currency of East Africa’s biggest economy has plunged 9.7 percent this year, the fourth-worst performer after Suriname’s dollar, Maldives’ rufiyaa and the Iranian rial.

“Underperforming rains in Kenya imply that this net food importer will have to import an even larger share of the food that is domestically consumed in 2011,” Mhango wrote. “This will place added pressure on the large current-account deficit,” and force the shilling to weaken over the next 18 months.

To contact the reporter on this story: Sarah McGregor in Nairobi at smcgregor5@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net


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