The Central Bank of Kenya (CBK) has hiked its key lending rate by 150 basis points in a quest to tame the fall of the shilling.
During the first meeting chaired by the newly appointed CBK Governor Patrick Njoroge, the bank’s monetary policy committee (MPC) raised its benchmark lending rate to 11.50 per cent from 10 per cent. This comes less than a month ago when the MPC had an emergency meeting increasing the rate for the first time since 2013.
The shilling has lost more than 8 per cent to the dollar reaching a new three and a half year low. On Tuesday, the shilling closed at 100.55 against the dollar. The bank expects this move will help prop up the shilling which has been performing dismally against the dollar.
“The Kenya shilling has remained under pressure, mainly reflecting the strengthening of the US dollar against most currencies. In addition, the current account deficit widened in part due to increased imports of capital equipment and weak exports,” the bank noted.
Since April, the shilling has been under pressure against the strengthening of the dollar due to a number of factors. The country has faced a shortfall in its foreign exchange reserves from the tourism and agriculture sector that have been performing poorly. Nonetheless, the CBK in the past implied on several occasions that it has adequate foreign exchange reserves to prevent any further weakening of the shilling.
“Interventions by Central Bank of Kenya (CBK) through direct sale of foreign exchange to commercial banks in periods of short-term exchange rate have dampened volatility,” the committee said.
With a 66.3 billion US dollar foreign exchange usable reserve, CBK anticipates to be able to withstand any shock for the next four months.
“The CBK’s level of usable foreign reserves remain adequate...The precautionary facility with the International Monetary Fund provides an additional cushion,” CBK explained.
In 2011, the CBK was unable to tackle internal and external shocks shaking the economy and pushing the currency to its highest mark of 107 Kenya shillings against the dollar.
According to reports, the government will decide in the coming months on whether to use the loan. However analysts say this move may not weather the current situation as there are several factors affecting the shilling.
The committee expects that with the raising of the benchmark lending rate, it will not only be able to tame the shilling but also inflation which has now reached the 7 per cent mark but is still within the government’s target.
“In view of these developments, the emerging risks, and the consequent need to anchor inflationary expectations,” the MPC noted.
Meanwhile, the Kenya Banks’ Reference Rate (KBRR) which was introduced at 9.13 per cent last year to act as the new base rate of all commercial bank’s was revised to 9.87 percent.