NAIROBI: Kenya’s central bank announced a surprise 150 basis point rise in its benchmark lending rate to 11.50 percent, saying a weaker shilling could push up prices.
Although the hike could curb economic growth, analysts said the central bank needed to tackle strong demand and credit growth that was contributing to a weakening exchange rate.
After a 150 basis point increase last month to 10.0 percent at a special policy meeting, most analysts polled by Reuters had forecast rates would stay on hold at this week’s meeting.
The shilling has weakened to a three-and-a-half year low of more than 100 to the dollar this week, hurt by global dollar strength and a widening current account deficit. It is inching towards the all-time low of about 107 recorded in October 2011.
The Monetary Policy Committee “noted elevated risks to the inflation outlook mainly attributed to pressures on the exchange rate over the last few months”, it said in a statement after its meeting, the first chaired by the new governor, Patrick Njoroge.
Njoroge, who was confirmed in his post last month, has said he would work to curb inflation, which is now around 7 percent, near the top of the bank’s target range of 2.5 to 7.5 percent.
“He is nailing his colours to the mast,” said analyst and independent trader Aly Khan Satchu. “The economy is not firing on all cylinders and a further interest rate hike transmitted through the economy is going to slow down things.”
Razia Khan of Standard Chartered Bank said the move “established the hawkish credentials” of Njoroge.
“We expect the latest measures to benefit the shilling in the near term,” she said, citing the need to tackle strong demand and credit growth. In its statement, the bank said growth in credit to the private sector was above target in May.
The bank also said it was introducing a three-day repurchase agreement, or repo, to help it manage liquidity in the market. The shilling was little changed in after-hours trading at 100.50/70, compared with the official close of 100.55/65.
Growth in the first quarter of 2015 compared with the same period a year ago was 4.9 percent, slightly lower than the 5.3 percent reported for 2014. The government has said it expects the economy to expand 6.5-7.0 percent this year.
