Kenya is expected to increase interest rates on the eve of elections scheduled for Aug. 9 to curb stubborn inflation and a sell-off in the shilling.
In May, the central bank of Kenya raised rates for the first time in seven years from 7.00% to 7.50%, citing high inflationary pressures due to rising commodity prices and disruptions in the supply chain.
The main reason for the second straight increase will be the expected US Fed rate hike and the need to keep a spread over developed market rates to reduce pressure on the Kenyan shilling, especially as the current account is likely to have widened further in 2Q22,” Mark Bohlund, senior credit research analyst at REDD Intelligence as quoted by Bloomberg.
The shilling has depreciated almost 5% this year against the dollar and is expected to continue to come under pressure due to higher oil prices stemming from Russia’s invasion of Ukraine, Nairobi-based AIB-AXYS Africa Ltd. said in a note Monday.
The decline in the shilling coupled with higher food and energy prices have fanned annual inflation that accelerated for a fourth straight month to 7.9% in June, exceeding the ceiling of the central bank’s target range for the first time in almost five years and resulted in a negative real interest rate.