Kenya should tighten monetary policy in order to stem the shilling’s decline to the weakest on record and curb inflation that may quicken to 22 percent “later this year,” according to Standard Chartered Bank Plc.
Kenyan policy makers have “exacerbated” the shilling’s depreciation to a 17-year low by not sending a decisive signal to investors that it’s addressing the issue, Razia Khan, the head of African research at Standard Chartered, told a conference today in Kenya’s capital, Nairobi. The central bank should raise its key lending rate, allow interest rates to rise, and sell foreign currency, Khan said.
Kenya’s shilling has lost 11 percent against the dollar this year, ranking as the world’s third-worst performing currency after Suriname’s dollar and Maldives’ rufiyaa. Drought, which is pushing up food prices, is partly to blame for surging inflation, which quickened for the seventh consecutive month to 13 percent in May.
“There’s been a policy of almost completely hands off,” Khan said. “What needs to be seen is evidence of greater resolve to rein in the shilling’s depreciation because of the impact it has on inflation. Very bold action is required.”
The central bank’s monetary policy committee, chaired by Governor Njuguna Ndung’u, unexpectedly cut its benchmark rate to a record low in January, and then reversed the decision two months later. At the committee’s last meeting in May, the MPC raised the rate by a quarter percentage point, and increased the amount of cash that lenders must hold in reserve. The MPC, which convenes every two months, is scheduled to meet in July.
Food, Fuel Pressure
Imported inflationary pressure coming from higher global fuel and commodity prices, is also hurting disposable income and threatening to weaken economic growth, Khan said.
Inflation may peak at 22 percent, or “possibly higher,” later in the year if the shilling continues depreciating and food and fuel prices stay high, she said.
Kenya has no plans to “interfere” in the currency market even as the government is concerned about the shilling’s drop, Finance Minister Uhuru Kenyatta said on June 17.
The shilling gained as much as 2.2 percent to 89.58 per dollar and traded 0.4 percent stronger at 91.25 by 1:47 p.m. in Nairobi after reaching 91.83 yesterday, the weakest intraday level since March 1994, when the nation abolished exchange controls and allowed the currency to trade freely.