Bloomberg News

Kenya May Raise Key Rate to Boost Worst-Performing Currency

October 05, 2011

(Updates with currency in fifth paragraph.)

Oct. 5 (Bloomberg) -- Kenya’s central bank may raise its benchmark interest rate for the second time in a month to help bolster the world’s worst-performing currency.

Governor Njuguna Ndung’u, who chairs the monetary policy committee, will raise the central bank rate to 7.75 percent today, according to the median estimate of nine economists surveyed by Bloomberg. The forecasts ranged from 7.5 percent to 10 percent.

The shilling lost a fifth of its value against the dollar this year, the most of more than 170 currencies tracked by Bloomberg, hitting a record low of 104.2 on Sept. 27. That’s adding to price pressures after the worst regional drought in 60 years boosted inflation to 17.3 percent in September, more than triple the central bank’s 5 percent target.

“Further tightening is required to curb inflation, strengthen the shilling and restore faith in the central bank,” Celeste Fauconnier, an Africa analyst at Johannesburg-based Rand Merchant Bank, said in an e-mailed note to clients. “Inflation is expected to remain elevated throughout the rest of the year.”

The MPC will publish its decision in an e-mailed statement, expected later today. The shilling strengthened for the first day in four, adding 0.4 percent to 101.57 per dollar by 9:05 a.m. in Nairobi today.

Neighbor Raises Rates

In neighboring Uganda, central bank Governor Emmanuel Tumusiime-Mutebile boosted the benchmark interest rate by 4 percentage points to 20 percent yesterday, to help bring down inflation that soared to 28.3 percent in September.

Kenya’s central bank has been slow to respond to rising prices this year, lowering its key rate to a record in January, then reversing the decision two months later. Ndung’u, who has blamed commercial banks for speculating in the currency market, wants to keep borrowing rates low enough to support consumer spending in East Africa’s biggest economy.

The central bank last raised its key lending rate by 0.75 percentage points, the steepest increase since the rate was introduced in June 2006, on Sept. 14 at a special meeting to review efforts to contain inflation and stabilize the shilling.

‘Self-Defeating’

“Inflation pressures point to a need for monetary tightening,” Phumelele Mbiyo, head of economic research for East Africa at CFC Stanbic Holdings Ltd., said in a note to clients. Keeping interest rates low to spur growth “will prove self-defeating if it is at the cost of macroeconomic stability and thus investment confidence.” Mbiyo forecast a 1 percentage point increase today.

Kenya’s economy contracted in the second quarter by a seasonally adjusted 4.6 percent as dry weather crimped agricultural production, which makes up a quarter of output in the world’s largest grower of black tea. That compares with an expansion of 2 percent between January and March, the Nairobi- based Kenya National Bureau of Statistics said on Sept. 29. The government expects growth of 5.3 percent this year, compared with 5.6 percent in 2010.

Inflation pressures are spreading in the economy. Safaricom Ltd., East Africa’s biggest mobile phone operator, raised its calling rates for the first time in 11 years on Oct. 1, citing a weaker currency and rising business costs.

--Editors: Nasreen Seria, Ben Holland, 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: Andrew J. Barden at barden@bloomberg.net


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