Tuesday, July 07, 2015
Kenya’s new central bank governor Patrick Njoroge is hamstrung by a sliding currency that’s challenging his ability to support an economy hit by a collapse in tourism.
Njoroge, 53, chairing his first Monetary Policy Committee meeting on Tuesday, is set to leave the benchmark interest rate unchanged at 10 percent, according to 14 of the 16 economists surveyed by Bloomberg. Two predicted an increase of 50 basis points to 100 basis points.
Kenya’s shilling is struggling after a slump in tourism and lower tea output reduced revenue from the nation’s biggest sources of foreign exchange. Policy makers took action at an unscheduled meeting last month to try and bolster the currency after it fell to a three-year low, raising the interest rate by 150 basis points. That may provide Njoroge, who took office on June 19, with some breathing space for now.
“Governor Njoroge has been handed a fireball because whatever action he takes the shilling will continue to suffer,” because of external pressures, Aly-Khan Satchu, chief executive officer of Rich Management, an adviser to wealthy investors, said by phone from Nairobi, the capital. “Raising rates will be a bullet in the head of the Kenya-rising story. Economic growth slowed in the first-quarter against wildly optimistic projections it would rise.”
East Africa’s biggest economy expanded 4.9 percent in the first quarter from a year ago, down from 5.5 percent in the three months through December, the statistics office said on July 1. The tourism industry, Kenya’s largest foreign currency earner after tea exports, contracted for a fifth consecutive quarter as a spate of violent attacks by Somali militants kept visitors away from the nation’s beaches and game reserves.
Tighter Policy
The central bank is scheduled to announce its decision on Tuesday afternoon. Last month’s rate increase was the first since 2011 and follows tighter monetary policy in African nations including Ghana, Uganda and Angola as central banks attempt to protect their currencies.
The shilling fell 0.5 percent to 100.13 against the dollar as of 4:10 p.m. in Nairobi on Monday, taking its decline this year to 9.5 percent. Yields on the government bond due January 2024 climbed 110 basis points to 13.38 percent since it began trading on Jan. 21.
A weaker currency is adding to pressure on inflation, which accelerated to 7 percent in June from 5.5 percent at the beginning of the year. The government’s target is 2.5 percent to 7.5 percent.
Njoroge, who replaced Njuguna Ndung’u in an appointment that surprised some analysts, was previously an adviser to a deputy managing director at the International Monetary Fund in Washington. Ndung’u’s deputy, Haron Sirima, 52, was favored to become governor after acting in the position since March.
Currency Pressure
In his first public comments last month about Kenyan monetary policy, he told lawmakers that his priority will be to contain inflation to help bring down commercial-bank interest rates in the country, which he said were “very high.”
“Governors would like to see lower interest rates, but he has to deal with the current environment,” Yvonne Mhango, a sub-Saharan Africa economist at Renaissance Capital in Johannesburg, said by phone. “There will be significant discussion on whether to tighten. We’ve seen the currency continue to come under pressure.”
Policy makers will also review the Kenya Banks’ Reference Rate, which commercial banks use to price loans. The rate is set every six months and was last cut to 8.54 percent in January.
Kenya’s reputation as a stable investment destination has been damaged since al-Qaeda-linked militants from Somalia began stepping up attacks in neighboring Kenya, killing at least 516 people in the past 2 1/2 years. A pre-dawn raid by al-Shabaab on a university campus in Garissa on April 2 killed 147 people.