(Updates with comment from Fitch in second paragraph.)
Oct. 6 (Bloomberg) -- Kenya and Uganda’s central banks took “decisive” action, boosting interest rates to a record this week to combat inflation and rescue their currencies, the International Monetary Fund said.
“We consider it very important to take strong measures to address” rising prices, Ragnar Gudmundsson, the IMF’s representative in Kenya, said in a phone interview from Nairobi today.
The central banks in Kenya and Uganda ramped up interest rates by 4 percentage points each this week to bolster their currencies, both of which have dropped by a fifth against the dollar this year, the biggest declines of more than 170 currencies tracked by Bloomberg. The worst regional drought in 60 years boosted prices in the two East African nations, pushing inflation to 28.3 percent in Uganda and 17.3 percent in Kenya in September.
“These moves are in the right direction,” Gudmundsson said. “Decisive measures to tighten monetary policy and to address interest rates upward, as required, are necessary and welcome.”
Kenya’s Monetary Policy Committee, led by central bank Governor Njuguna Ndung’u, yesterday increased the key lending rate to 11 percent, while Uganda lifted its rate to 20 percent the day before.
Kenya’s shilling snapped three days of losses after the rate decision, gaining as much as 1 percent to 100.95 against the dollar yesterday. The currency was at 102.28 as of 3:03 p.m. in Nairobi today, while Uganda’s shilling was 0.2 percent stronger at 2,860 per dollar.
Fitch Ratings said today the rate increases “are the first tangible demonstration” that the two countries are tackling inflation and the action should help with “stabilizing the currency” and curbing price pressures. Kenya’s debt is rated B+, four levels below investment grade, by Fitch, while Uganda has a rating of B.
“Inflation in the two African nations is being driven by global food and fuel prices, the regional drought and a weakening currency,” Fitch said. “Both countries are experiencing balance of payments pressures as a result of strong economic growth and high oil and food import prices.”
While higher interest rates may undermine economic growth, controlling inflation is a bigger priority, Gudmundsson said. Kenya’s economy contracted a seasonally adjusted 4.6 percent in the second quarter, compared with a 2 percent expansion in three months earlier, the country’s statistics agency said on Sept. 29.
Inflation pressure is spreading in the economy. Safaricom Ltd., East Africa’s largest mobile phone operator, this month raised its calling rates for the first time in 11 years, while Total SA’s Kenyan unit said 2011 profit will be lower than last year due to rising prices and the weak currency.
“It’s precisely because there’s second-round effects of inflation, that has led core inflation to exceed 9 percent, that we consider it very important to take strong measures to address” inflation, Gudmundsson said.
The IMF, which approved about $509 million in loans to Kenya for balance of payments support, will conduct its second assessment of the economy from Oct. 13 to Oct. 31. Kenya has asked the Washington-based IMF to release additional funds from the three-year loan program to help deal with the weakening shilling, President Mwai Kibaki said on Sept. 8.
--Editors: Nasreen Seria, Gordon Bell
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