Kenya: Central Bank decides to hike interest rate in June
June 9, 2015
At its 9 June monetary policy meeting, the Central Bank of Kenya (CBK) decided to raise the Central Bank Rate by 150 basis points, from 8.50% to 10.00%. The Bank, which typically holds a monetary policy meeting every three months, had announced on 27 May that it would hold its next meeting earlier than normally scheduled. The move comes amidst a backdrop of a rapid weakening in the value of the Kenyan shilling in recent months. The Central Bank Rate is now at its highest level since December 2012.
In its accompanying statement, the Central Bank noted that although overall inflation fell in May, this was largely the result of a decrease in food prices following a long monsoon. However, non-food non-fuel inflation accelerated for the third consecutive month, largely on the back of the weak value of the shilling. Moreover, the Bank added that the shilling remains under pressure due to the widening of Kenya’s current account deficit and the strong U.S. dollar.
Regarding the global economy, the Bank commented that growth remains broadly unchanged since the last monetary policy meeting in May. Growth in Sub-Saharan Africa is projected to remain relatively stable despite downside risks from low prices for commodities. Regarding Kenya, the Bank sees the economy recording healthy growth this year driven by prudent macroeconomic policy, government spending on infrastructure and private sector credit growth.
In conclusion, the Central Bank noted that while the tightening stance adopted by the Bank has limited the rapid deprecation in the shilling, the currency remains vulnerable to volatility. The projected recovery in international oil prices along with demand pressures may impact inflationary pressures and exchange rate movements going forward. Against this backdrop, the Bank decided to “augment its tightening stance” and raise the Central Bank Rate. Moreover, the Bank added that it “will continue to monitor developments in the external and domestic economics and their implications on the risks to overall price stability”.