Bloomberg News

Kenya, Uganda May Boost Interest Rates as Currencies Slide

November 01, 2011

(Updates with more forecasts in second paragraph and today’s currency performance in fifth.)

Oct. 31 (Bloomberg) -- Kenya and Uganda may boost borrowing costs by as much as 2 percentage points each tomorrow to bolster their currencies and curb soaring inflation, economists said.

Njuguna Ndung’u, governor of the Central Bank of Kenya, will raise the central bank rate to a record 12.5 percent, according to the median estimate of five economists surveyed by Bloomberg. The forecasts ranged between 50 basis points and 200 basis points. Uganda’s Governor Emmanuel Tumusiime-Mutebile will probably increase the key lending rate by 2 percentage points to 22 percent, according to Standard Chartered Plc.

Kenya’s shilling has slumped 19 percent against the dollar this year, the biggest decline of more than 170 currencies tracked by Bloomberg, as the worst drought in six decades boosted inflation and the central bank was slow to tighten monetary policy. The central bank of Uganda and Kenya pushed up their lending rates by 4 percentage points each last month.

“A bias toward further tightening is likely to tame inflationary pressure which is being driven by earlier easy access to credit,” Aly Khan Satchu, head of Rich Management, an investment adviser for wealthy individuals, said in a phone interview from Nairobi. “The recent rains will ease food availability with the possibility of inflation plateauing.”

Uganda’s currency rose as much as 1 percent to 2,584 per dollar today and was trading at 2,588 as of 12:11 p.m. in Kampala, paring its decline to 11 percent this year. Kenya’s shilling was trading 0.1 percent lower at 99.85 per dollar.

Tanzania, Rwanda

Kenya’s Monetary Policy Committee will publish its decision in an e-mailed statement tomorrow, while Uganda’s central bank will hold a press conference at 10:15 a.m. in Kampala.

Central bank governors from Kenya, Uganda, Tanzania, Rwanda and Burundi, which makes up the East African Community, agreed on Oct. 12 to coordinate their actions to tighten monetary policy and limit volatility in their currencies. Kenyan inflation reached 18.9 percent in October, while consumer prices surged 28.3 percent in Uganda in September.

“The worsening inflation profile calls for more decisive action from the Central Bank of Kenya,” Razia Khan, head of Africa economic research at Standard Chartered Plc, said in a note to clients.

Rate Cuts

Kenya, Uganda and Nigeria, which raised its key lending rate by 2.75 percentage points to 12 percent on Oct. 10, have bucked a global trend by boosting borrowing costs to protect their currencies. Brazil, Turkey, Switzerland, Israel and Indonesia have cut borrowing costs since August to support their economies as a debt crisis in Europe threatens the global recovery.

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. Uganda’s central bank has lowered its economic growth projection for the year through June 2012 to 5 percent from 6 percent.

“The upward trend in inflation is expected to continue until the first quarter of next year due to a weaker shilling and food-supply constraints, hence a rate hike will be appropriate” in Kenya, Peter Wachira, senior investment manager at PineBridge Investments LLC’s East Africa unit, said in a phone interview from Nairobi.

--With assistance from Simbarashe Gumbo in Johannesburg and Fred Ojambo in Kampala. Editors: Nasreen Seria, Paul Richardson

To contact the reporter on this story: Johnstone Ole Turana in Nairobi at jturana@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net


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