Bloomberg News

Kenyan Budget Office Criticizes Central Bank’s Mixed Signals

October 05, 2011

(Updates with comments on currency speculation in eighth paragraph.)

Oct. 5 (Bloomberg) -- Kenya’s central bank is sending mixed signals on monetary policy that may be fueling speculation in the weakening currency and eroding investor confidence, the non- partisan Parliamentary Budget Office said.

While the bank is “undertaking quite a number of measures to control the decline of the Kenyan shilling, it is sending mixed signals to the market,” the Nairobi-based office, which researches domestic economic topics to inform Kenyan lawmakers, said on its website yesterday. “This may have caused investors to lose confidence in the country’s management of the financial crisis, making them view Kenya as a risky place to invest.”

Inflation accelerated to 17.3 percent in September, rising for the 11th straight month, as the shilling, the world’s worst performer, fell to a record low of 104.2 against the dollar, possibly undermining the country’s economic recovery because imports are becoming more expensive.

Gross domestic product in East Africa’s largest economy declined 4.6 percent in the second quarter after expansion of 2 percent three months year earlier, as dry weather hurt farming output and consumers spent less on non-essentials.

Kenya’s monetary policy has confused some investors and analysts as the central bank unexpectedly cut the key lending rate to a record low in January, at the same time inflation exceeded the government’s 5 percent target, and then reversed the decision two months later.

Mixed Signals

Kenya’s money-market rates soared and then eased in August after changes to the formula for calculating the overnight lending rate, which is the interest charged on loans from the central bank to commercial lenders.

Governor Njuguna Ndung’u has blamed the currency’s decline on speculation, the deteriorating global economy and growing demand for dollar-paid imports.

“Possibly, the mixed signals are also fueling speculative tendencies, causing people to hoard dollars with the expectation that the shilling will slide further,” according to the report.

The shilling fell for the fourth straight session, losing 0.1 percent to 102.1 by 11:50 a.m. in Nairobi, compared with a close of 101.95 yesterday, according to Bloomberg data.

The Central Bank of Kenya’s rate-setting monetary policy committee is meeting today, less than a month after it raised the key lending rate by a record 0.75 percentage point to 7 percent at an emergency meeting on Sept. 14.

--Editors: Jennifer M. Freedman, 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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