Bloomberg News

Kenyan Inflation Surges to 16.7% on Shilling Slump, Drought

August 30, 2011

(Updates with analyst comment in the third paragraph.)

Aug. 30 (Bloomberg) -- Kenyan inflation accelerated to 16.7 percent in August, more than triple the central bank’s target, as the worst regional drought in 60 years boosted food prices and the shilling fell to a 17-year low.

The inflation rate rose from 15.5 percent in July, the Nairobi-based Kenya National Bureau of Statistics said in an e- mailed statement today. Prices increased 1.25 percent in the month, the agency said.

The Central Bank of Kenya left its key lending rate unchanged at 6.25 percent on July 27, saying that inflation is being fueled by drought that higher interest rates can’t influence. Governor Njuguna Ndung’u has turned instead to adjusting the discount overnight rate, which commercial banks use to borrow from the central bank, in a bid to strengthen the shilling, which fell to a low of 95.10 against the dollar on Aug. 9.

“The central bank is using other measures to achieve their aim of tightening,” Yvonne Mhango, an economist at Renaissance Capital, said in a telephone interview from Johannesburg today. “With the tools they are trying to impact more on credit growth and the shilling.”

The currency was little changed at 93.70 against the dollar as of 4:22 p.m. in Nairobi from 93.50 before the data was released. The shilling has slumped 14 percent against the dollar this year, the second-worst performing African currency after Uganda’s shilling, according to data compiled by Bloomberg.

Food Inflation

Kenya has raised the minimum wage by 12.5 percent, cut import duties on wheat and corn, and reduced excise levies on diesel and kerosene this year, to help support consumers and ward off protests against the rising living costs.

Food prices rose 24 percent in August from a year earlier, the same pace as in July, the statistics office said. A weaker currency boosted fuel costs by the same magnitude this month.

Ndung’u said on Aug. 18 the central bank will “fight” for price stability and food prices will probably start easing as early as September or October. Inflation will probably peak in October, Mhango said.

Bond yields surged this year on concern inflation will erode returns. The yield on the five-year bond climbed to 13.887 percent at an auction on Aug. 24, the highest level since at least May 2006. The yield on the 30-year security jumped to a record of 16.397 percent at the same auction.

--Editor: Gordon Bell, Nasreen Seria, Louis Meixler

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

To contact the editor responsible for this story: Paul Richardson at pmrichardson@bloomberg.net


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