Kenya Central Bank Sees Tight Policy Curbing Price Pressures

  • Governor Njoroge says inflation expectations 'need to fall'
  • Central bank working to reduce foreign-exchange volatility

Kenyan central bank Governor Patrick Njoroge said higher interest rates have helped to curb inflation, which will probably remain at current levels in the near term.

“We have been pursuing a very tight monetary policy,” Njoroge told reporters Tuesday in the capital, Nairobi, at his first press conference since being appointed in June. “There are good prospects that inflation will be at the same level in the near future.”

Price growth in East Africa’s biggest economy slowed to 5.8 percent in August from 6.6 percent in July and compared with this year’s peak of 7.1 percent in April. The central bank raised its benchmark interest rate twice this year by 300 basis points to 11.5 percent to stem inflation and help support the shilling, which has weakened 14 percent against the dollar since January. The currency has weakened as inflows from exports of tea and tourism, the nation’s biggest foreign-exchange earners, declined.

Njoroge said that while the currency has stabilized in recent days, the Monetary Policy Committee has assessed that inflation expectations are yet to ease. That’s the reason the MPC left interest rates unchanged for a second time at its meeting on Sept. 22, he said.

“Inflation expectations need to fall," he said.

Currency Stability

Njoroge said the MPC is comfortable with the government’s inflation target of 2.5 percent to 7.5 percent and there is scope for price growth to slow further.

While there’s evidence that stability is returning to the foreign-exchange market after the central bank acted to reduce volatility, it will remain vigilant, he said. “This is not a battle we can say has been won," Njoroge said, adding that he was “working to reduce market indiscipline.”

The central bank has been dipping into its foreign exchange reserves to smooth volatility in the domestic currency market. Reserves stood at $6.18 billion as of Sept. 18. Kenya also has access to about $610 million in a standby credit facility from the International Monetary Fund in case of economic shocks.

The central bank had been “quite active” selling dollars and mopping up excess liquidity in support of the shilling, Mwambu Malamba, an analyst at Nairobi-based Commercial Bank of Africa, said by phone. The central bank doesn’t publicly give out details about its dollar sales.

“This isn’t sustainable,” Malamba said. “They can’t be selling dollars forever. Reserves have reached critical levels and you don’t want them to go below the current level.”

Njoroge said that imports of consumer goods have been declining, while occupancy rates at hotels for September to December have risen to above 50 percent from almost nothing in the preceding months.

Kenya’s tourism industry went into decline after travel advisories from governments including the U.K. caused the number of international visitors to drop 31 percent in the seven months through July. Governments issued advisories against visiting selected parts of Kenya following several attacks by Somalia-based Islamist militants.

The shilling traded 0.2 percent stronger at 105.35 per dollar by 5:03 p.m. in Nairobi.

Before it's here, it's on the Bloomberg Terminal.