On Tuesday, Kenya’s central bank announced a significant increase in interest rates to stabilize the shilling currency. The devaluation of the shilling has resulted in pricing pressures, reduced foreign investment, and impacted debt payments.
The Central Bank of Kenya increased the policy rate (KECBIR=ECI) by two percentage points, bringing it to 12.5%. This is the policy rate’s first increase since June, when it was increased by one percentage point.
“There is a need to adjust the monetary policy stance in order to address the pressures on the exchange rate and mitigate second round effects,” the Monetary Policy Committee (MPC) of the central bank said in a statement following the announcement.
“This will ensure that inflationary expectations remain anchored while setting inflation on a firm downward path towards the 5.0 percent mid-point of the target range.”
Inflation (KECPI=ECI) fell to 6.8% year-on-year in November, down from 6.9% in October. The central bank stated on Tuesday that exchange rate depreciation had contributed around 3.0 percentage points to the November estimate. In October, inflation was 6.9%.
Over this year, the value of the shilling has decreased by more than 19% compared to the dollar, striking many all-time lows along the way.
The MPC will meet once more in February 2024, according to the central bank’s statement. “The MPC… stands ready to further tighten monetary policy as necessary to ensure price and exchange rate stability are achieved,” the statement stated.
According to Razia Khan, head economist for Africa and the Middle East at Standard Chartered Bank, there has been pressure from the International Monetary Fund and the World Bank to tighten policy substantially.
“Market interest rates were already well in excess of the policy rate, so it’s questionable whether this has a near-term impact,” explained the economist.
Kenya is being attentively observed to determine how it will manage the settlement of a Eurobond with a face value of two billion dollars that will mature in June of the following year.
After speaking with reporters, the governor of the central bank, Kamau Thugge, stated that the authorities were anticipating receiving $300 million from the regional bank, Trade and Development Bank, during the first two weeks of December. This money would be used to purchase back a portion of the Eurobond.
According to Thugge, Kenya anticipated receiving additional budget help from the World Bank of $1.25 billion to $1.5 billion at the beginning of the following year.