Bloomberg News

Kenya Shilling Weakens Before Central Bank’s MPC Special Meeting

September 14, 2011

Sept. 14 (Bloomberg) -- Kenya’s shilling weakened before a special meeting of the Central Bank of Kenya’s Monetary Policy Committee today.

Governor Njuguna Ndung’u, who leads the committee, may say that inflation will peak as early as this month and the resumption of seasonal rains will ease food prices, said Fred Mweni, managing director of Nairobi-based Tsavo Securities Ltd. The bank, which will hold its regular meeting at the end of the month, hasn’t said whether it will adjust its benchmark interest rate from 6.25 percent today.

The shilling declined as much as 0.5 percent against the dollar to 94.95 and traded down 0.2 at 94.65 by 12:41 p.m. in Nairobi, the capital. It closed at 94.45 yesterday after touching a 17-year low of 95.80 earlier in the day.

The worst regional drought in 60 years has fueled price pressures in East Africa’s biggest economy, triggering a 15 percent slide in the shilling against the dollar this year.

The central bank left its key rate unchanged at its previous meeting in July, defying economists’ expectations of an increase. The bank has instead adjusted its discount-window rate, which is the cost commercial lenders pay to borrow from the central bank, several times since June to tighten liquidity.

“I don’t see any drastic actions coming out of the meeting,” Mweni said in a phone interview yesterday. The central bank may indicate “food production could improve, easing inflation, maybe in the next month or two.”

The bank is scheduled to announce the outcome of its meeting today.

Rainfall

Inflation surged for a 10th month in August, reaching 16.7 percent, as the shilling’s depreciation added to import costs, the statistics office said on Aug. 30. Near-normal precipitation is forecast during the October to December short-rain season, according to the Kenya Meteorological Department, easing the impact of a drought that’s left 3.75 million Kenyans in need of food aid.

Consumer prices should drop by December, Joseph Kinyua, permanent secretary in the Finance Ministry, told reporters in Nairobi today. “With the onset of rains because of the food component being one of those that have been driving inflation up, other things being constant, I see in the next three months inflation beginning to come down,” Kinyua said.

Ndung’u is under pressure to increase the benchmark rate to restore confidence in the central bank after a series of monetary policy decisions that were reversed this year.

Prediction ‘Difficult’

“The frequent and unexpected decisions of the Central Bank of Kenya this year makes it difficult to predict what the meeting will hold,” Celeste Fauconnier, Africa analyst at Rand Merchant Bank, a unit of Johannesburg-based FirstRand Ltd., said in a note to clients yesterday.

The central bank restricted commercial banks’ access to funds from its discount window since August to prevent them from borrowing cheaply and investing in higher-yielding Treasury bills. That pushed up the discount-window rate by more than 20 percentage points to 31.4 percent in the two weeks through Aug. 26.

Changes made since then have helped lower the rate to 9.25 percent today, according to the central bank’s website.

--Editor: Nasreen Seria, Paul Richardson, Ana Monteiro, Heather Langan.

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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