Wednesday, July 8, 2015

Kenya raises rate another 150 bps on inflation risks

    Kenya's central bank raised its benchmark Central Bank Rate (CBR) by another 150 basis points to 11.50 percent to anchor inflationary expectations, noting the "elevated risks to the inflation outlook mainly attributed to pressures on the exchange rate over the last few months."
    The Central Bank of Kenya (CBK), which has now raised its rate by a total of 300 basis points following a hike in June, added that it had introduced a 3-day repo to help it manage liquidity, noting "the need to closely monitor liquidity conditions in the market."
    "The outlook for the global economy remains uncertain," the central bank's Monetary Policy Committee said in a statement from July 7, adding:
    "In particular, the recent developments in Greece, possible turbulence in the global markets, and the uncertainty around the timing of increase in US interest rates are cause for concern."
    In was the first committee meeting chaired by Patrick Njoroge, a former advisor to the International Monetary Fund (IMF), who took over as central bank governor last month, replacing Njuguna Ndung'u, who stepped down in March.
     As a consequence of the two rate increases, the Kenya Banks' Reference Rate (KBRR), which has replaced the base lending rate, will rise to 9.87 percent from January's 8.54 percent. KBRR was introduced in July 2014 to improve the transmission of monetary policy and enhance transparency and is based on CBR and a 2-month weighted moving average of the 91-day Treasury bill.
    KBRR is reviewed by the CBK every six months.
    Kenya's inflation rate rose to 7.03 percent in June from 6.87 percent in May, mainly due to higher fuel prices, pass-through effects from the weaker shilling and moderate demand pressure. Kenya's government targets inflation of 5.0 percent, plus/minus 2.5 percentage points.
    Kenya's shilling has been under pressure due to weaker exports of tea and declining revenue from tourism in light of attacks by insurgents against a backdrop of a general rise in the U.S. dollar. However, the CBK said diaspora remittances remain resilient and intervention by direct sales of foreign exchange had helped dampen volatility.
    The shilling's depreciation started accelerating in March this year and it has now fallen to levels not seen since 2011 when it fell to 106 to the U.S. dollar, forcing the CBK to raise its rate to a record 18 percent. Today the shilling was trading at 100.4 to the dollar, down 9.8 percent this year.
    The central bank's level of usable foreign reserves remain adequate at US$6.630.9 billion, down from $6.739.2 billion from June, but the equivalent of 4.2 months of import cover. The central bank added that its precautionary facility with the IMF provides an additional cushion.
    Kenya's economy remains "robust," the CBK said, noting annual growth of 4.9 percent in the first quarter of this year, down from 5.5 percent in the fourth quarter but above 4.7 percent in the first quarter of 2014.


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