Kenya looks to stabilize currency with big hike in interest rate
In an unexpected move, Kenya's central bank, under the leadership of Governor Kamau Thugge since June, has raised its benchmark interest rate for the second time. The decision is attributed to the necessity of supporting the country's weakened shilling, stabilizing the exchange rate, and managing inflationary pressures.
The monetary policy committee implemented a significant increase of 200 basis points, bringing the benchmark interest rate to 12.5%, marking the most substantial hike since 2011. Governor Thugge conveyed this announcement in an emailed statement from Nairobi on Tuesday.
The bank's Monetary Policy Committee (MPC) explained the decision, stating, "There is a need to adjust the monetary policy stance to address the pressures on the exchange rate and mitigate second-round effects. This will ensure that inflationary expectations remain anchored while setting inflation on a firm downward path towards the 5% mid-point of the target range."
Key Takeaways
The depreciation of the shilling has resulted in increased price pressures, hindered foreign investment, and impacted debt servicing. The year-on-year inflation slightly decreased to 6.8% in November from 6.9% in October. The central bank noted on Tuesday that the depreciation of the exchange rate contributed approximately 3 percentage points to the November inflation reading. Throughout the year, the shilling has experienced a decline of over 19% against the dollar, reaching repeated all-time lows. Razia Khan, the Chief Africa and Middle East economist at Standard Chartered Bank, highlighted the influence of international entities such as the International Monetary Fund (IMF) and World Bank, urging a significant policy tightening. Furthermore, Kenya is under scrutiny regarding its approach to settling a $2 billion Eurobond maturing in June of the following year. The combination of these factors underscores the complexity of managing economic stability and external obligations in the face of currency challenges.
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