Bloomberg News

Kenya, East Africa Nations to Coordinate Monetary Policy

October 12, 2011

(Updates with analyst’s comment in eighth paragraph.)

Oct. 12 (Bloomberg) -- Central bank governors from Kenya, Uganda and other members of the five-nation East African Community agreed to coordinate their actions to tighten monetary policy and limit volatility in their currencies.

Policy makers also plan to work together to curb “currency speculation activities,” according to an e-mailed statement from the governors. Kenya’s Njuguna Ndung’u, Uganda’s Emmanuel Tumusiime-Mutebile, Benno Ndulu of Tanzania and Rwanda’s Claver Gatete met in Kenya’s capital, Nairobi, today. Gaspard Sindayigaya, Burundi’s central bank governor, the fifth EAC member, was also consulted, it said.

Surging food and fuel prices have pushed up inflation in the region, which is suffering from the worst drought in six decades, giving central banks reason to raise key lending rates. The central banks of Kenya and Uganda increased their benchmark interest rates by 4 percentage points each to a record last week to help bolster their currencies, which have lost a fifth of their value this year.

“The region is facing very high inflation originating primarily from high food and fuel prices but also from demand pressures,” according to the statement. “The governors also observed that the region is facing pressures on the currencies to weaken and exchange rate volatility.”

Rwanda Rates

Inflation in Kenya, East Africa’s biggest economy, accelerated to 17.3 percent in September, more than triple the government’s 5 percent target, while in Uganda the rate jumped the highest in 18 years at 28.3 percent. Tanzania’s shilling has weakened 13 percent against the dollar this year, while inflation surged to a 15-month peak of 14.1 percent in August.

Rwanda’s central bank raised its benchmark interest rate by half a percentage point to 6.5 percent on Oct. 7, the first increase in almost three years.

Today’s statement may indicate policy makers are ready to take stronger action to tame inflation, Yvonne Mhango, an economist with Renaissance Capital in Johannesburg, said in an e-mail.

“Expect further tightening in the region on the back of this statement until inflation shows signs of abating, which we expect from the first quarter of 2012, and until the exchange volatility subsides,” Mhango said.

The EAC may adopt a protocol next year to create a monetary union to ease fiscal and monetary volatility in the region, Secretary-General Richard Sezibera said on Sept. 7.

--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: Paul Richardson at pmrichardson@bloomberg.net


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