Bloomberg News

Kenya Tightens Monetary Policy Further to Cool Inflation

June 29, 2011

(Updates with central bank rate increase in final paragraph.)

June 29 (Bloomberg) -- Kenya’s central bank raised its overnight lending rate to the banks as it attempts to rein in inflationary expectations and curb speculative trade in the shilling.

The Central Bank of Kenya will charge 8 percent on overnight loans and review the rate every day at 9 a.m., according to an e-mailed statement from the Nairobi-based bank. It previously applied the Central Bank Rate, currently at 6.25 percent, to the loans. The bank also blocked the use of funds borrowed from the overnight window to trade in the foreign- exchange market.

“This further tightening of the monetary policy stance will curtail second-round effects arising from fuel and maize prices and exchange-rate volatility that have been fueling inflationary expectations,” the bank said.

Kenya’s inflation rate climbed for the eighth consecutive month to 14.5 percent in June as food and fuel prices increased, the Kenya National Bureau of Statistics said today. The shilling has declined 10 percent against the dollar this year, making it Africa’s second-worst performing currency, after neighboring Uganda’s, according to Bloomberg data.

“This decision is expected to address the recent wild swings in the local currency, which was largely due to arbitrage and speculative trading,” Fred Moturi, a fixed-income dealer at Nairobi-based Sterling Investment Bank Ltd., said in a phone interview today.

The shilling strengthened 0.4 percent to 89.80 per dollar by 1:23 p.m. in Nairobi. It closed at 90.15 yesterday.

The central bank raised its key interest rate by a quarter point twice this year, in March and May, from a record low of 5.75 percent.

--Editors: Philip Sanders, Ana Monteiro

To contact the reporters on this story: Paul Richardson in Nairobi at pmrichardson@bloomberg.net; Johnstone Ole Turana in Nairobi jturana@bloomberg.net.

To contact the editor responsible for this story: Antony Sguazzin at asguazzin@bloomberg.net.


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