Nov. 1 (Bloomberg) -- Kenya and Uganda’s central banks raised their benchmark interest rates to record highs and vowed to keep tightening monetary policy should inflation worsen.
Kenya’s Monetary Policy Committee, led by Governor Njuguna Ndung’u, increased the key lending rate by 5.5 percentage points to a record 16.5 percent, the Nairobi-based central bank said in an e-mailed statement today. The median estimate of five economists surveyed by Bloomberg was for the rate to rise to 12.5 percent. Kenya also increased the cash reserve ratio, the percentage of deposits that lenders store at the commercial bank, by 50 basis points to 5.25 percent effective Dec. 15.
“This bold policy move is positive for the Kenyan shilling,” Yvonne Mhango, a Johannesburg-based economist with Renaissance Capital, wrote in an e-mail response to questions. “It sends a positive signal that the Central Bank of Kenya is now finally boldly fighting inflation.”
Kenya follows Uganda, which earlier today raised its benchmark interest rate by 3 percentage points to 23 percent, as the East African nations battle to contain inflation spurred by the worst regional drought in 60 years and higher fuel prices. Both countries boosted borrowing costs by 4 percentage points last month.
The Kenyan shilling plunged 19 percent against the dollar this year by yesterday’s close, the most of more than 170 currencies tracked by Bloomberg. The currency advanced 0.8 percent to 98.40 per dollar by 8:02 p.m. in Nairobi, little changed from before the announcement.
Inflation in Kenya, East Africa’s biggest economy and the world’s largest producer of black tea, accelerated to 18.9 percent in October from 17.3 percent in the previous month, the statistics office said on Oct. 28. Uganda’s inflation rate jumped to an 18-year high of 30.5 percent last month, the statistics agency said yesterday. The inflation rate in Uganda will probably peak in the coming months and slow next year, its central bank Governor Emmanuel Tumusiime-Mutebile said today.
In Kenya, surging prices pose a threat to economic growth and must be “resolutely” addressed through tightening of monetary policy, Domenico Fanizza, head of an International Monetary Fund team assessing Kenya’s economy, said yesterday.
Kenya’s central bank said a study it carried out showed that credit growth to private industry and exchange-rate volatility have fanned inflation, threatening the country’s economic recovery and macroeconomic stability.
“Going forward, monetary policy has to reverse these expectations through further tightening that will bring inflation and inflationary expectations under control and stabilize the exchange rate to protect the economic growth base,” Kenya’s central bank said.
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