Nigeria, Kenya and Uganda bucked a global trend by raising interest rates to record levels in the past week as they struggle to protect their currencies and curb soaring inflation.
Nigeria’s central bank boosted its key rate by 275 basis points to 12 percent on Oct. 10 at an emergency meeting, less than a week after Kenya and Uganda lifted their policy rates by 4 percentage points each. The currencies of the two East African nations have lost a fifth of their value this year, making them the worst performers in the world, according to Bloomberg data.
“Central banks are going to try to look after their currencies to steer inflation away from increasing as significantly as it has,” Celeste Fauconnier, an Africa analyst at Johannesburg-based Rand Merchant Bank, said in a telephone interview. “The only way they can sort of manage the issue is through monetary policy.”
Before Nigeria’s rate decision, the naira slumped 7.4 percent against the dollar on the interbank market this year, reaching as low as 166.60 on Oct. 10. The currency surged as much as 4.6 percent the day after the rate announcement.
The worst drought in 60 years in East Africa fueled inflation in Kenya and Uganda, driving investors to abandon the currencies just as risk aversion globally picked up, compounding their plunge. Inflation in Uganda surged to 28.3 percent in September and reached 17.3 percent in Kenya.
Brazil, Turkey, Switzerland, Israel and Indonesia have cut borrowing costs since August to support their economies as a debt crisis in Europe threatens the global recovery, while the U.S., U.K. and Japan have kept rates near zero. India is the only large emerging-market nation to raise borrowing costs in the past two months, lifting its repurchase rate by 25 basis points to 8.25 percent in September.
The central bank in Kenya raised its benchmark rate to 11 percent on Oct. 5, while Uganda boosted its rate to 20 percent the day before, with both indicating they will increase borrowing costs further to help support their currencies. In Rwanda, which borders Uganda, Tanzania, Burundi and Democratic Republic of Congo, the central bank increased its key rate for the first time in almost three years to 6.5 percent on Oct. 7.
The central banks of Kenya, Tanzania, Uganda, Burundi and Rwanda agreed to coordinate the tightening of monetary policy, curb currency speculation and reduce currency volatility, the East African Community said in an e-mailed statement today.
Price pressures may increase in Nigeria after the naira weakened and the government prepares to remove fuel subsidies next year. Inflation slowed to 9.3 percent in August, staying below 10 percent for a second consecutive month, the statistics office said on Sept. 14.
“Maintaining exchange rate stability, especially in times of global uncertainty, is crucial to the mandate of price stability,” Nigerian central bank Governor Lamido Sanusi said on Oct. 10.
The naira gained 1.8 percent to 156.1 per dollar at 2:42 p.m. in Lagos. The Kenyan shilling rose 1.8 percent to 104.23 per dollar, while the Ugandan shilling advanced 0.1 percent to 2,880.
Oil-price declines and high dollar demand at twice-weekly foreign exchange sales have depleted Nigeria’s foreign-currency reserves, making it more difficult for the central bank to support the naira within its targeted 3 percentage-point band above or below 150 per dollar.
The reserves of Africa’s biggest oil producer have declined 9 percent to $31.4 billion in the 12 months through Oct. 6, according to data from the Abuja-based central bank.
In Kenya, the weaker currency is driving import prices higher, reducing personal spending and investment and threatens growth, Charles Robertson, global chief economist for Renaissance Capital in London, said in a phone interview. Higher rates may help draw investment back to the region, he said.
“In a world of zero percent rates in the West, these sort of levels are likely to help stabilize currencies,” Robertson said. “When the global markets get more confident, which I imagine will happen in the next two or three months, you will see a rally in these currencies.”