(Bloomberg) -- Kenya’s central bank unexpectedly raised its benchmark interest rate for the second time since Governor Kamau Thugge took office in June, citing the need to support the country’s battered shilling.
The monetary policy committee increased the rate by 200 basis points to 12.5%, the largest increase since 2011. The news was announced by Thugge in an emailed statement Tuesday from the capital, Nairobi. Only one of the seven economists surveyed by Bloomberg forecast an increase.
The MPC “concluded that there is need to adjust the monetary policy stance to address the pressures on the exchange rate and mitigate second-round effects including from global prices,” he said.
“Today’s interest rate hike helps ensure some of the highest real interest rates in Africa,” Charlie Robertson, Head of Macro Strategy at FIM Partners, wrote in a note to clients, referring to inflation-adjusted borrowing costs. That’s “helpful in containing inflation. It’s also helpful in reassuring foreign investors about their commitment to macro stability,” he said.
The shilling has weakened by almost 20% against the dollar so far this year, making it one of the worst-performing currencies in Africa as investors balked at the potential repayment of a $2 billion Eurobond in June. The weakness has been despite additional financial support from the International Monetary Fund, which last month granted staff-level approval for an additional $938 million to bolster the East African nation’s reserves.
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“Once we get the external financing, and also in particular the IMF funding in January, that would be liquidity into the system and that will reduce our domestic borrowing significantly,” Thugge said at a briefing following the interest rate announcement. “We are also getting some money from the World Bank Development Policy Operation, and all these amount will help up deal with the issue of the Eurobonds.”
He said Kenya expects $1.25 billion to $1.5 billion from the World Bank, alongside as much as $500 million from the regional Trade and Development Bank.
“We will be getting a lot of external financing in the second half of the financial year,” he said. “So we should be able to reduce domestic borrowing quite significantly”
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Kenya’s consumer price inflation slowed to 6.8% in November from 6.9% the prior month. Still, the cost of imported food staples, as well as crucial commodities like oil, have become more expensive because of the strength of the dollar.
The MPC noted that “exchange rate depreciation continues to exert upward pressure on domestic prices, thereby increasing the cost of living and reducing purchasing power.” It judged that currency weakness had contributed about 3 percentage points — or almost half — of November’s rise in prices.
The current account deficit is projected to be 4.1% of gross domestic product in 2023 and 4.2% in 2024 last year, the central bank said.
Foreign-exchange reserves stood at $6.7 billion, equivalent to 3.6 months of import cover and continues “to provide adequate cover and a buffer against any short-term shocks in the foreign exchange market,” the MPC said.
In the banking sector, the level of non-performing loans stood at 15.3% in October compared to 15% in August. Private sector credit was relatively stable at 12.5% in October.
“Public sector external debt service has risen, thereby offsetting some of the gains made towards the government’s strong fiscal consolidation,” the governor said. “Further, the continued weakening of the exchange rate is contributing to a significant increase in the Kenya shilling value of foreign currency denominated debt.”
--With assistance from Helen Nyambura, Rene Vollgraaff and Eric Ombok.
(Updates with analyst reaction in fourth paragraph.)
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