Kenya’s central bank may raise interest rates further amid concern that the shilling is too volatile, Governor Patrick Njoroge said.
Swings in the currency’s value are “a big problem,” Njoroge told lawmakers Thursday in the capital, Nairobi. The volatility “worries us.”
The bank has increased its benchmark lending rate twice since June to 11.5 percent to curb inflation that accelerated as the shilling weakened 11 percent against the dollar this year. It’s also intervened in the domestic foreign-exchange market by selling dollars, Njoroge said. Kenya’s Monetary Policy Committee next meets on Aug. 5.
“The central bank still has plenty of fire power,” he said. “If indeed additional tightening is needed, we will go ahead and do it.”
Central banks in the East African countries of Kenya, Uganda and Tanzania have tightened monetary policy and intervened to stabilize their currencies, which were among the five worst performers on the continent in the second quarter. The declines threaten to curb the region’s economic performance, Bloomberg Intelligence said in a July 6 note.
“Very hawkish comments from the governor certainly, clearly leaving open the possibility of further action,” said Razia Khan, head of African economic research at Standard Chartered Plc in London.
“Njoroge has very quickly established himself a reputation as a more activist CBK governor, who will address currency weakness with all tools available to him,” Khan said in an e-mailed response to questions.
Njoroge, a former adviser at the International Monetary Fund, took over as governor in June and has pledged to fight rising prices in East Africa’s biggest economy. The annual inflation rate rose to 7 percent in June, close to the top of the central bank’s 7.5 percent target range.
Growth in Kenya, which has reserves of $6.5 billion, has been slow since a spate of attacks by Islamist militants hurt tourism, a key generator of foreign-exchange earnings. The shilling weakened 0.4 percent against the dollar to 102.10 by 3:08 p.m. in Nairobi.
Kenya’s budget deficit, which is projected at 8.7 percent of gross domestic product in the year through June 30, 2016, is “really worrisome,” Njoroge said. The gap came in at 8.8 percent in the previous fiscal year. Investors are also concerned that the shortfall is big and may ask for a larger return on their money, he said.