Kenya hikes MPR to almost 12-year high on inflation, currency concerns
- The Central Bank of Kenya has raised borrowing costs to their highest level since 2012.
- The decision aims to support the shilling but has resulted in a decline in bonds.
- Kenya's 10-year eurobond due 2032 has experienced further losses following the announcement.
The Central Bank of Kenya has taken financial markets by surprise with its decision to raise borrowing costs (Monetary Policy Rate) to their highest level since 2012. This move comes as risks to inflation remain elevated and aims to support the shilling, albeit at the expense of bonds, which experienced a decline.
Governor Kamau Thugge announced that the monetary policy committee has increased the benchmark rate to 13% from 12.5%. This marks the third rate hike since Thugge assumed office in June and the seventh in the ongoing tightening cycle that commenced in May 2022. The cumulative increase now stands at 600 basis points.
Following the announcement, Kenya's 10-year eurobond due 2032 registered further losses, with its yield rising by 1 basis point to 10.54% by 6:30 p.m. in Nairobi, according to Bloomberg pricing.
In December, Governor Kamau Thugge emphasized his commitment to taking all necessary measures to lower inflation to the 5% midpoint of the Central Bank of Kenya's target range. Inflation has remained above this level since November 2020, partly attributed to a significant depreciation of the currency. The Kenyan shilling managed to strengthen by 0.3% against the dollar by the close of trading in Nairobi, although it has still incurred losses of almost 25% since the beginning of last year. The International Monetary Fund (IMF) also anticipates inflation to tick upwards in the first half of this year. This projection is primarily attributed to global oil price volatility and exchange rate pass-through effects, as outlined in the IMF's sixth review of Kenya’s program with the lender.