Kenya’s central bank took a bold step last week on Tuesday, announcing a significant interest rate hike in a bid to stabilize the struggling shilling currency (KES= USD 0.0065). The currency’s depreciation has not only triggered inflationary pressures but also hampered foreign investment and impacted debt-servicing.

The Central Bank of Kenya raised its policy rate by 2 percentage points to 12.5%, marking its first hike since June, when it increased it by 1 percentage point. The move aims to address the challenges posed by exchange rate fluctuations and mitigate their broader effects. The bank emphasized its commitment to anchor inflationary expectations and guide inflation towards the 5.0 percent mid-point of the target range.

In November, inflation  dipped slightly to 6.8% year-on-year from 6.9% in October. The central bank attributed about 3 percentage points of this decline to the depreciation of the exchange rate. The shilling  has seen a significant decline of over 19% against the dollar this year, hitting repeated all-time lows along the way.

The Monetary Policy Committee (MPC) assured its readiness to tighten monetary policy further, emphasizing the importance of achieving price and exchange rate stability. The MPC is scheduled to reconvene in February 2024.

Razia Khan, Chief Africa and Middle East Economist at Standard Chartered Bank, noted that international financial institutions, including the International Monetary Fund and World Bank, had exerted pressure on Kenya to take meaningful policy tightening measures. While market interest rates already exceeded the policy rate, the immediate impact remains uncertain.

The country’s handling of a maturing $2 billion Eurobond in June 2024 is closely monitored. Central bank governor Kamau Thugge revealed plans to secure $300 million from the Trade and Development Bank in early December to facilitate the repurchase of part of the Eurobond.

Additionally, Kenya expects substantial budget support of $1.25-$1.5 billion from the World Bank early next year. The economic landscape in Kenya is evolving, and the central bank’s proactive measures aim to navigate the challenges and maintain stability.

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