Inflation Risk Spells First Kenyan Rate Increase Since 2011

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Kenya’s central bank is poised to raise borrowing costs for the first time in 3 1/2 years to stop inflation from breaching government targets and bolster a weakening currency.

The Monetary Policy Committee will lift the benchmark rate by 100 basis points to 9.5 percent at a meeting on Tuesday, according to nine out of 12 economists surveyed by Bloomberg. The other three expect a 50-basis-point hike from 8.5 percent, where it’s been held since May 2013. An index of Kenyan shilling bonds is losing more money for dollar investors than most emerging markets in the first quarter as yields on 10-year debt jumped to their highest level in about 17 months.

“If the MPC acts forcefully with a significant hike now, this means that they will need to tighten by less over the course of the whole cycle,” Razia Khan, head of Africa macroeconomic research at Standard Chartered Plc in London, said in an e-mailed response to questions. Policy makers will increase by 100 basis points this round and another 50 basis points later this year, she said. “This is the start of a tightening cycle.”

The MPC, which meets every two months, brought forward its July meeting after the shilling plunged to its lowest level against the dollar since November 2011, threatening to spur inflation already near the ceiling of the government’s 2.5 percent to 7.5 percent target range. The currency weakened 6.8 percent against the greenback this year because of a drop in revenue from tea exports and tourism -- the two biggest generators of foreign-currency earnings.

Bond Losses

The central bank has had to respond to a weaker shilling before. In 2011, the regulator increased interest rates six times to a record 18 percent to help the currency rebound from a record low.

The shilling weakened 0.2 percent to 97.07 per dollar by 9:13 a.m. in Nairobi on Monday. Kenyan shilling bonds have lost 3.4 percent for dollar investors this quarter, more than the average 0.1 percent loss for 31 emerging-market local currency debt tracked by Bloomberg. Yields on the East African nation’s notes due March 2025 climbed to 12.9 percent last week, the highest since January 2014, according to data compiled by Bloomberg.

The MPC meeting was brought forward “to review recent developments in the market following significant changes in some key macroeconomic indicators and consider appropriate policy action to keep inflation within the targeted path,” acting central bank Governor Haron Sirima, who will lead the meeting, said last week.

“It is no secret that the recent weakness in the Kenyan shilling has taken most market participants –- ourselves included -– by surprise,” Morgan Stanley analysts, including Michael Kafe and Andrea Masia, said in an e-mailed note. “Having already brought forward the meeting, we believe that it would be rather awkward if the committee stays put. A 75-100 basis-point rate hike could well be on the cards.”

Incoming Governor

President Uhuru Kenyatta on June 2 nominated Patrick Ngugi Njoroge, an International Monetary Fund adviser, to succeed Njuguna Ndung’u as central bank Governor after completing his maximum term. Njoroge’s appointment still needs to be debated and voted on by lawmakers.

“He will to need the articulate the interest rate policy, and how he wants to manage the shilling,” Aly-Khan Satchu, chief executive officer of Nairobi-based Rich Management, an adviser to wealthy investors, said by e-mail on the appointment of Njoroge.

Poor rains have boosted prices of crops including corn and potatoes and curbed production of black tea, of which Kenya is the world’s biggest exporter.

All of these factors, combined with the shilling’s depreciation in a nation that relies on imports for goods ranging from wheat and sugar to cars and fuel is weighing on the outlook for inflation. Kenyan consumer-price growth will probably exceed 9 percent by year-end, according to Standard Chartered’s Khan.

“A big move now should help calm the FX market, as it will demonstrate their seriousness in dealing with the threat,” she said. “If the MPC opts for piecemeal gradually-gradually-type tightening, the risk is -- being already seen to be late in tightening -- that they might have to scramble to do even more later on.”

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