The Central Bank of Kenya on Monday raised its key interest rate by 50 basis points to 7.5 percent in a bid to contain rising inflation and stabilise the country’s currency, the Shilling.
The interest rate increase is the first such move in close to seven years.
The CBK said that inflation had increased from 5.6 percent in March to 6.5 percent in April 2022, mainly due to higher food and fuel prices.
Moreover, food and fuel inflation rose to 12.1 percent and 8.5 percent, respectively, with the CBK noting the impact of the crisis in Ukraine and other global disruptions to the local economy.
“The Committee noted the elevated risks to the inflation outlook due to increased global commodity prices and supply chain disruptions, and concluded that there was scope for a tightening of the monetary policy in order to further anchor inflation expectations. In view of these developments, the MPC decided to raise the Central Bank Rate (CBR) from 7.00 percent to 7.50 percent,” the CBK said in a statement.
Kenyans are currently grappling with high food and fuel prices forcing the government to take measures, such as fuel subsidies, to cushion citizens.
The CBK said Kenya’s economy had rebounded strongly in 2021 following the easing of COVID-19 restrictions and was expected to remain resilient in 2022.
“Leading economic indicators show continued strong performance in the first quarter of 2022, supported by robust activity in construction, information and communication, wholesale and retail trade, transport and storage, and manufacturing sectors.”
The CBK also said that it had enough foreign exchange reserves ($8,179 million) to provide adequate cover and a buffer against any short-term shocks in the foreign exchange market.
Separately, prior to the CBK’s announcement, some economic sector players expressed their concerns about a reported shortage of dollars in the market.
The Kenya Association of Manufacturers (KAM) said there were insufficient dollars for local manufacturers who are highly dependent on imported raw materials and intermediate inputs to access those products and other capital goods.
“Although the formally quoted exchange rate for the US$ in the market is hovering around Kshs 115-116, none of our members can access currency at that price in the real market price (as evidenced in our purchases) is now above Kshs 120 and it is our belief that the differential is contributing to the shortage. Exporters and other entities holding US$ are reluctant to sell the dollar at lower prices as it is clear and visible to them what the market value of the currency is,” the KAM said in a statement.
“Neither are banks ready to trade dollars between themselves, further exacerbating the supply constraints. The risk here is that we are creating a parallel shadow market with unwanted consequences.”
The KAM said the shortage was having an adverse impact on manufacturers by raising their working capital by forcing them to plan for foreign currency payments by purchasing foreign currency in advance and affecting relationships with suppliers through cuts or delays to supplies.
“From the foregoing, it would appear that the market is losing confidence in transparency and effectiveness of our foreign exchange market. This situation compounded with the global challenges we are all facing calls on the Central Bank and the Monetary Policy Committee to propose and implement policy actions that will return the market to predictability and, crucially, to supplies of currency as and when needed in order to restore confidence in the market.”
The Petroleum Outlets Association of Kenya (POAK) echoed KAM’s sentiments saying its members were “truly between a rock and a hard place”.
“We are hurting badly from this situation. Without dollars our petroleum products are as expensive as ever,” POAK said.
(Story compiled with assistance from wire reports)