Bloomberg News

Kenya Raises Interest Rate by 4 Points to Rescue Shilling

October 05, 2011

(Updates with economist’s comment in third paragraph and shilling in fifth.)

Oct. 5 (Bloomberg) -- The Central Bank of Kenya raised its benchmark interest rate by a record 4 percentage points, signaling a policy shift in a bid to combat inflation and rescue the shilling.

The Monetary Policy Committee, led by Governor Njuguna Ndung’u, raised the key lending rate to 11 percent, the Nairobi- based central bank said in an e-mailed statement today. That was higher than the 7.75 percent median estimate of nine economists surveyed by Bloomberg.

Kenya’s move follows the central bank in neighboring Uganda, which yesterday raised its benchmark rate by the same magnitude to 20 percent. The worst regional drought in 60 years has boosted food prices and weakened the currencies of the two East African nations, both of which have lost about a fifth of their value against the dollar this year, the worst performers of more than 170 currencies tracked by Bloomberg.

“The Central Bank of Kenya hike is just what was needed and echoes what we’ve seen in Uganda,” Charles Robertson, global chief economist for Renaissance Capital, said in an e- mail today. The increase shows the central bank’s “commitment to inflation” and it may help the shilling appreciate to 100 against the dollar or stronger, he said.

Shilling Snaps Losses

The shilling snapped three days of losses, gaining as much as 0.9 percent to 101.03 against the dollar today, and was trading at 101.25 as of 4 p.m. in Nairobi.

Kenya is struggling to bring down an inflation rate that soared to 17.3 percent in September, more than triple its 5 percent goal. Investors and Kenyan lawmakers have criticized Ndung’u for failing to curb inflation after he lowered the benchmark to a record low in January and then reversed the decision two months later.

“This is perhaps the first good market news we’ve had in a while,” John Bates, the head of fixed income at London-based Silk Invest Ltd., said in an e-mail. “Inflation is clearly ringing alarm bells within the government and it looks like decisive action is being taken.”

The MPC, which will meet every month from now, indicated in its statement it will increase interest rates if inflation pressure and currency volatility don’t ease.

‘Additional Threats’

The committee is “concerned that inflationary pressure continued to increase and that both the weakening of the shilling and its volatility posed additional threats,” Ndung’u said in the statement.

Soaring inflation and a weaker currency are undermining company earnings. Total SA’s Kenyan unit said on Oct. 3 annual profit will be “significantly lower” than the previous year because of high interest rates, the shilling’s slump and rising prices.

The MPC no longer believes that inflation is a temporary problem, an assumption that had led to a “gradual” tightening of monetary policy earlier this year, the committee said.

Drought has curbed agriculture production and crimped demand in East Africa’s largest economy, which contracted by a seasonally-adjusted 4.6 percent in the second quarter, compared to an expansion of 2 percent three months earlier, the Kenya National Bureau of Statistics said on Sept. 29.

“This certainly helps in the restoration of confidence in the central bank,” said Fred Moturi, a fixed-income trader with Sterling Capital Ltd. who forecast a 3 percentage point increase. “It’s not going to be the only thing they will have to do, but it’s a step in the right direction.”

--With assistance from Simbarashe Gumbo in Johannesburg. Editors: Nasreen Seria, Karl Maier

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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