The CBK raised interest rates by 150 basis points to 10.00 percent. Oil prices are expected to recover and there has been alot of pressure from demand as well as volatility in the forex market will affect inflation in the near term.
The CBk last raised interest rates in May 2013. The central bank had brought forward its July policy meeting and hence the move was expected and did not come as a surprise at all. Many economists anticipated the move by the CBK but forecasts were a raise in rates by 50 or 100 basis points. This move should avoid any further depreciation of the shilling. It also gives a strong message to the financial markets that the CBK is committed to reduce inflation and depreciation of the shilling.
The depreciation of the shilling started in March and hit lows that were only seen in 2011 when it traded at 106 to the U.S dollar. The interest rate was then raised to 18% in 2011. The U.S is also expected to tighten it’s monetary policy and this has been contributing to major currencies falling including the EUR, GBP and JPY which have fallen by more than 2000 pips in a couple of months. Low tourist turnout due to a constant threat from Al-Shabaab militia has also contributed vastly to the decline of the shilling. This has created a wider current account deficit.
The central bank said its usable level of foreign exchange reserves amounted to $6.739.2 billion, down from $6.859 billion at the end of April and $7.224 billion as of Feb. 26.
After the rate hike the shilling gained from 97.7 to 97.0 . However this is still a decline of 6.6% this year and 10.8% since early 2014.In May Kenya’s CPI rate eased to 6.87 percent from 7.08 percent in April. The government has been targeting an upper bound range of 2.5% on either side of the medium term target of 5%.
The IMF says the Kenyan economy is resillient and expects a growth of 6.5% this year.
Previously the central bank had also announced Forex derivatives trading in Kenya was to start in July.