Next Call on Kenyan Rates Splitting Analysts as Shilling Weakens

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Six weeks into the job and Central Bank of Kenya Governor Patrick Njoroge is already dividing economists on what his next move on interest rates will be.

A weakening currency, a stubborn trade deficit and dwindling foreign exchange reserves are bolstering the case for the third rate increase in as many months on Wednesday. Still, a slowing economic expansion, deceleration in inflation and falling commodity prices give the Monetary Policy Committee some reason to pause with borrowing costs at a 2 1/2-year high.

“He can afford to take a pass this time” and leave the key rate at 11.5 percent, Aly-Khan Satchu, chief executive officer of Nairobi-based Rich Management Ltd., which provides investment advice to wealthy individuals and companies, said in an e-mailed response to questions on Monday. Higher rates aren’t helping to stem the shilling’s slide and the currency’s weakness has yet to translate into faster inflation, he said.

An index of local currency Kenyan bonds fell 3.8 percent in July, declining a fourth month for the worst dollar returns this year after Brazil, Turkey and Colombia among 31 developing nations tracked by Bloomberg. The shilling weakened more than 10 percent against the dollar in 2015 as sliding foreign-currency earnings from tourism and tea, the nation’s biggest sources of foreign exchange, and heightened global risk aversion weigh on the currency.

Economists Split

Satchu joins John Ashbourne of Capital Economics Ltd. and Alan Cameron of Exotix Partners LLP, who see rates unchanged in a survey of 12 economists by Bloomberg. Four forecast an increase to 13 percent, four to 12.5 percent, one predicts a 50 basis point rise and another a jump to 13.5 percent. Last month, 13 of 16 economists were in sync for an unchanged stance, with only one calling the 150 basis points increase correctly.

Njoroge, 53, a former adviser at the International Monetary Fund, took over as governor on June 19 with a pledge to fight rising prices.

Consumer price increases eased to 6.6 percent in July from 7 percent the previous month, the Kenya National Bureau of Statistics said July 31.

So far, his efforts to stem the shilling’s slide by intervening in the foreign exchange market by selling dollars and drying up liquidity hasn’t had the desired effect, with the currency tumbling to 103.71 per dollar on July 13, the lowest since October 2011.

The shilling “remains under pressure,” Razia Khan, head of African economic research at Standard Chartered Plc in London, said by e-mail. “Anything up to a further 150 basis point hike to 13 percent is plausible.”

Rates Rise

The shilling gained 0.3 percent to 101.15 per dollar by 6:53 p.m. in Nairobi, the capital, on Tuesday, the best level on a closing basis since July 23. Yields on shilling notes due January 2024 jumped 60 basis points to 12.05 percent.

Njoroge told lawmakers last week that swings in the shilling pose “a big problem” to Kenya if investors demand higher returns.

“If indeed additional tightening is needed, we will go ahead and do it,” he said. Treasury Secretary Henry Rotich said on July 15 that the MPC has space to pause because inflation hasn’t breached the regulator’s 7.5 percent ceiling.

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