Kenya’s Central Bank raises benchmark rate shore up shilling

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Central Bank of Kenya’s Monetary Policy Committee has decided to raise the benchmark lending rate from 8.5 per cent to 10 per cent, the first increase since 2011.

The decision, made at a meeting of the MPC called a month earlier than scheduled, is meant to address inflation fears and shore up the battered Kenya shilling better than the CBK’s interventions in the market.

A statement signed by MPC vice-chairman Haron Sirima said the rapid depreciation of the shilling’s exchange rate had been curtailed by the “tightening bias” stance adopted by the policy body and implemented by CBK through its monetary operations.

However, he added, rising forex demand, volatility in global markets and an expected rise in international oil prices “have implications on inflationary expectations”. He also noted the potential of consumer price inflation as importers pass-through past exchange rate movements.

“The MPC, therefore, decided to augment its tightening stance by raising the CBR by 150 basis points from 8.50 per cent to 10 per cent,” he said.

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The Central Bank Rate is a significant component in the Kenya Banks Reference Rate used to determine interest rates for loans offered by commercial banks.

The average commercial banks’ lending rates declined from 15.46 per cent in March this year to 15.40 per cent in April, while the average deposit rate eased slightly from 6.63 per cent to 6.60 per cent during the period.

The shilling firmed to 97.15/25 per dollar after the decision, from 97.30/50 earlier. It had slumped to 3-1/2 year lows, forcing the Central Bank of Kenya’s (CBK) Monetary Policy Committee to bring its meeting forward by a month.

The rate rise “helps to restore the anti-inflation credibility of the central bank and should help the shilling in the near term,” said Razia Khan, Head of Research for Africa at Standard Chartered in London.

The change was the first since a cut two years ago, the last rate hike was in December 2011.

“Great move by the CBK – delivering even more than the market was looking for,” Khan said. But she cautioned that Kenya’s 10 percent current account gap could mean the rate hike will only slow, rather than halt, the shilling’s drop in value.

“The persistent volatility in the global foreign exchange markets coupled with the projected recovery in international oil prices have implications on inflationary expectations,” the MPC said in a statement.

The weakening shilling could drive inflation, the MPC said.

Inflation rose to 7.08 percent in the year to April, heading towards the upper limit of the central bank’s 2.5-7.5 percent target band, but eased to 6.87 percent in May.

The MPC said it would monitor developments at home and abroad in order to stay on top of any risks to price stability.

“The central bank wanted to do some shock therapy,” said Aly Khan Satchu, an independent trader and analyst, referring to the larger-than-expected rate rise. “They were seeking to send a very undiluted message to the market.”

In a Reuters poll of 12 analysts, most forecast a rise of 100 basis points, while two predicted a lower hike. None expected such a big increase.