Africa: Kenya strives for credibility

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By:
Dominic O’Neill
Published on:

More pressure on East African currencies; Kenyan central bank raises rates

Kenya’s central bank has offered welcome relief to markets, which had been spooked in 2011 partly by the bank’s previously lethargic response to sharp rises in inflation. Governor Njuguna Ndung’u has raised rates by 475 basis points after two specially convened monetary policy meetings in recent weeks.

After an initial rise of 75bp in mid September some analysts were expecting – and hoping for – a much bigger increase. An additional 400bp rate hike was then announced.

Inflation

Even before the increased pressure last month on global emerging markets, the Kenyan shilling has fallen more than 15% against the dollar this year. Inflation has risen from less than 4% a year ago to more than 17% in September – partly thanks to high oil prices in this oil-importing country.

Kenya’s inflation rate in September 

Kenya’s inflation rate in September

Also causing higher inflation are bad regional harvests and high global food prices: events that have had especially tragic consequences across the border in Somalia.

Before September’s rise, however, the central bank had increased the policy rate by only a total of 25bp since the beginning of the year. Ndung’u raised rates by 25bp in March, and again in May. Yet the governor had cut rates by 25bp in January, despite inflation having risen by almost 50% between August 2010 and the end of the year.

"Monetary policy in tackling [food and energy] sources of inflation has limited possibilities, but we also do know these are seasonal in nature and will disappear in time," Ndung’u said in a press release in mid-September.

Another contributor to inflation, according to Stuart Culverhouse at London broker Exotix, is fiscal stimulus implemented after the 2008 global crisis that has not yet been relaxed. Henry Rotich, deputy director of economic affairs at the Kenyan treasury, expects the government’s budget deficit to widen to 8.8% of GDP in the 12 months from June 2011, according to Bloomberg.

Region

Meanwhile, other East African economies, such as Uganda and Tanzania, are similarly reliant on oil imports and have also been adversely affected by bad harvests or regionally higher food prices. The Uganda shilling was down more than 17% year-to-date against the dollar, as Euromoney went to press.