(Updates shilling in sixth paragraph, cancellation of MPC meeting in last.)
Sept. 15 (Bloomberg) -- Kenya’s central bank raised its benchmark interest rate in a special meeting yesterday, in a bid to restore credibility after it said earlier actions had led to volatility in financial markets.
The central bank rate was lifted to 7 percent from 6.25 percent, the biggest increase since the rate was introduced in 2006. Governor Njuguna Ndung’u said in a statement yesterday the bank’s “overriding objective” is to curb inflation and earlier actions “failed to deliver stability.”
“This should help boost market confidence going forward,” Razia Khan, head of Africa economic research at Standard Chartered Plc in London, said in an e-mailed note. “It’s an overwhelming positive move, that sets out to confront the confusion over policy that had arisen in the recent past and makes clear the intent of policy makers in the future.”
Ndung’u, 52, cut the key rate in January even as the worst regional drought in six decades boosted inflation, triggering a 15 percent slump in the shilling against the dollar. The bank reversed the decision two months later and restricted liquidity to commercial lenders in a bid to shore up the currency. That policy failed, with banks losing faith in the central bank’s ability to manage the crisis.
The Monetary Policy Committee “strongly reiterated its overriding objective to fight inflation and to bring it down to target levels,” Ndung’u said in the bank’s statement yesterday. “The committee noted that some of its earlier reactions to the crisis had failed to deliver stability and they were even interpreted adversely.”
The shilling gained as much as 0.8 percent to 94.35 against the dollar today and was trading at 94.55 as of 4:15 p.m. in Nairobi.
Inflation quickened to 16.7 percent in August, more than triple the government’s 5 percent target, the statistics office said on Aug. 30. Price pressures are persisting and “the return to normal prices has been slower than the experience in 2009,” the central bank said.
Ndung’u may need to take stronger action to curb inflation, said Celeste Fauconnier, an Africa analyst at Rand Merchant Bank in Johannesburg.
“The Central Bank of Kenya is still behind the curve in normalizing policy, necessitating continued interest rate hikes to tame inflation, help strengthen the shilling and restore faith in the central bank’s policymaking abilities,” she said in an e-mailed note to clients today.
Discount Window Rate
The central bank surprised the market at its last meeting in July by leaving the key lending rate at 6.25 percent, saying monetary policy won’t prevent “supply-side inflation” pressures from rising food and energy costs.
To counter a weaker currency, the bank began last month adjusting its discount window rate, which is the cost commercial lenders pay to borrow from the central bank, boosting it by more than 20 percentage points to 31.4 percent within two weeks in August.
Confusion over the use of the central bank rate and the discount window rate undermined monetary policy, leading investors to call for more clarity and prompting Finance Minister Uhuru Kenyatta to urge for a restoration of monetary stability last month.
“The inability to message the market in a normal and rational manner has been causing at least a third of the confusion,” Aly-Khan Satchu, head of Rich Management, an investment company for wealthy people, said in a phone interview from Nairobi before the rate decision.
International Bond Sale
The central bank said its policy rate will be tied to targets on domestic money supply with the aim of controlling inflation. To help ease liquidity and strengthen the shilling, the government has requested additional support from the International Monetary Fund and will raise funds through the sale of infrastructure bonds.
The Finance Ministry is also considering bringing forward a plan to sell an international bond during the current fiscal year that ends in June, Ndung’u said.
Kenya’s six-month borrowing costs climbed to the highest in a decade to 11.935 percent at an auction this week, according to data from the central bank, which received bids for about half of the 6.5 billion shillings it offered for the 182-day securities.
A regular MPC meeting scheduled to take place at the end of this month was canceled, MPC member Sheila M’Mbijjewe said by phone today from Nairobi.
“The MPC had a very extensive meeting yesterday and we will continue to monitor the situation,” she said. “We will meet whenever is necessary.”
--Editors: Nasreen Seria, Andrew J. Barden
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