Kenya: Central Bank surprisingly hikes interest rate again in July amid weakening currency and rising inflation
July 7, 2015
At its 7 July monetary policy meeting, the Central Bank of Kenya (CBK) surprisingly decided to raise the Central Bank Rate (CBR) by 150 basis points, from 10.00% to 11.50%— its highest level since October 2012. The Bank, which typically holds a monetary policy meeting every three months, hiked the CBR by 150 basis points in June. Prior to that meeting, the CBR had been resting at 8.50% for over two years. . July’s rate hike came amidst a backdrop of a rapid depreciation of the Kenyan shilling (KES) and rising inflation in recent months. The recent meeting was the first meeting since Patrick Njoroge took office as Central Bank Governor and July’s rate hike highlights his commitment to fighting inflation.
In the accompanying statement, the Bank noted that overall inflation rose to 7.0% in June, moving closer to the upper bound of its inflation target range of 2.5 percentage points around its 5.0% target. In the Bank’s view, rising inflation largely reflects the pass-through effect from a depreciating Kenyan shilling, higher fuel prices, as well as subdued demand. The Bank noted that the shilling remained under pressure, largely owing to the strength of the U.S. dollar and Kenya’s widening current account deficit. In fact, on 6 July, the shilling depreciated to below 100 KES per USD for the first time since October 2011. However, the Bank pointed out that its interventions in the foreign exchange market helped curb the volatility of the Kenyan currency and emphasized that its level of international reserves as well as a precautionary facility with the IMF had provided adequate buffers. Regarding the budget for fiscal year 2015/2016, which was presented in June, the Bank expects that greater allocations for boosting security along with the country’s shrinking tourism sector will be beneficial for the exchange rate given that tourism is a main source of foreign exchange. As for economic growth, in the Bank’s view Kenya’s economy grew at a robust pace in Q1, while the outlook for the global economy is uncertain due to the ongoing Greek crisis, possible financial market turmoil and uncertainty about the timing of the U.S. Federal Reserve’s next interest rate hike.
In conclusion, the Central Bank noted that risks to the inflation outlook were “elevated” and tilted to the upside, with the recent depreciation of the Kenyan currency and higher fuel prices being the main risks. Against this background, the Central Bank said that its decision to hike the rate was necessary to fight inflation and to anchor inflation expectations. In addition, the Bank stated that it will, “continue to monitor external and domestic developments and their implications on the risks to the overall price stability.” The next monetary policy meeting is scheduled for 5 August.