Kenya’s Central Bank Raises Key Interest Rate to 6.25% to Cool Inflation

The Central Bank of Kenya, East Africa’s largest economy, increased the key interest rate for the second time this year to curb inflation that has stayed above the government’s target since January.

The Monetary Policy Committee raised the benchmark lending rate by a quarter of a percentage point to 6.25 percent, the Nairobi-based central bank said in a statement on its website today. All seven economists surveyed by Bloomberg had forecast the rate would increase between a quarter and 1 percentage point. The central bank also increased its cash reserve ratio, the percentage of deposits that banks must hold at the central bank, by a quarter point to 4.75 percent.

“The central bank should have made a much more bold decision as they are already behind the curve,” Aly-Khan Satchu, an independent financial analyst, said by phone from Nairobi. “The impact is that there will be continued weakness in the bond market and continued softness in the shilling.”

Inflation accelerated for a seventh month to a 25-month high of 13 percent in May, as fuel prices rose in line with surging global commodity costs, while dry weather made food more expensive, the Kenya National Bureau of Statistics said today. The government’s inflation target is 5 percent.

‘Building Pressures’

The MPC at its last meeting on March 22 increased the key lending rate by a quarter point from a record low of 5.75 percent, undoing a cut two months earlier. It cited “building inflationary pressures.”

Kenya’s weather office reported last week that poor rains during the so-called long March-to-May rainy season hurt crop development in many parts of the country, where farming represents a quarter of the economy. Food makes up the largest component of the consumer price basket at 36 percent.

The Kenyan shilling has depreciated 6.13 percent against the dollar since the start of the year, and was trading 0.37 percent stronger at 85.65 as of 5:38 p.m. in Nairobi, compared with a close of 85.85 yesterday.

The International Monetary Fund last week cut its growth forecast for Kenya this year to between 5 percent and 5.4 percent, from a projection of 5.7 percent in April.

Kenya, whose inflation rate is the second highest in East Africa after Uganda, has proposed removing duties on imported corn and wheat to bolster food supplies, and it cut taxes on kerosene, a cooking fuel, and diesel to contain price growth.

Gasoline Prices

The retail price of super petrol, the most frequently used fuel to power vehicles, surged 23 percent between November and May, Kenya’s Energy Regulatory Commission said.

Efforts by the government to reduce the supply of the local currency through selling repurchase agreements should also help bring down inflation, Domenico Fanizza, the IMF’s mission chief to Kenya, said on May 24. The government has sold 21.4 billion shillings ($250 million) in repos since May 11.

“The MPC is in a tight spot with accelerating inflation, a worsening growth outlook due to poor rainfall, and the dampening effect of high oil prices on economic activity,” Yvonne Mhango, an analyst with Renaissance Capital who had forecast a half- point increase, said in a May 27 note. There is scope to “tighten boldly,” she said.

To contact the reporter on this story: Sarah McGregor in Nairobi at  smcgregor5@bloomberg.net.

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net.

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