Kenya central bank hikes key rate again, citing sticky inflation

The bank raised the rate to 13.0% on from 12.5%, its monetary policy committee (MPC) said in a statement, after a larger 2-percentage-point hike at the December MPC meeting. The East African country has been on the radar of foreign investors because of its strained public finances and a steep fall in the shilling in the leadup to the maturity of a $2 billion Eurobond in June.

Kenya's central bank raised its main lending rate for the second meeting in a row on Tuesday, citing sticky inflation and lingering pressure on the local currency. The bank raised the rate to 13.0% on from 12.5%, its monetary policy committee (MPC) said in a statement, after a larger 2-percentage-point hike at the December MPC meeting.

The East African country has been on the radar of foreign investors because of its strained public finances and a steep fall in the shilling in the leadup to the maturity of a $2 billion Eurobond in June. "The proposed action will ensure that inflationary expectations remain anchored, while setting inflation on a firm downward path towards the 5.0% mid-point of the target range, as well as addressing residual pressures on the exchange rate," the bank said.

Inflation picked up to 6.9% year-on-year in January, towards the upper end of authorities' preferred medium-term range of 2.5% and 7.5%. Kenya's shilling fell more than 20% against the dollar last year, hitting repeated all-time lows along the way.

It is down a further 2% so far this year but has shown signs of stabilising in recent trading sessions. "The risks to inflation remain elevated in the near term, reflecting the impact of second-round effects of the rise in fuel inflation, and pass-through effects of exchange rate depreciation," the bank said.

The central bank said its foreign exchange reserves, at $7.1 billion, or 3.8 months of import cover, provided an adequate shield against short-term shocks. It said it expects a strong economic performance this year, building on estimated growth of 5.6% in 2023.

It now sees this year's current account deficit at 4.0% of gross domestic product from 3.9% in 2023, down from a forecast of 4.2% it had in December because of improved agricultural exports and remittances.