IMF backs CBK interest rate hikes

The International Monetary Fund (IMF) has welcomed monetary policy tightening by the Central Bank of Kenya (CBK) as an effective measure to check inflation.

According to the multi-lateral lender, the CBK should consider further rate hikes in the short run to contain the effect of higher food and fuel prices.

At the same time, the IMF says the weaker shilling has provided a soft landing for the economy off the back of challenges presented first by the COVID-19 pandemic.

“The CBK's recent monetary policy tightening is welcome. The CBK should stand ready to continue to adjust its stance to limit second-round effects from higher food and fuel prices to keep inflation expectations well-anchored amid a temporary increase of inflation above the target band,” stated IMF Acting Chair and Deputy Managing Director Antoinette Sayeh.

“The flexible exchange rate functioned as a shock absorber during the pandemic and should continue to do so against current global shocks, with forex interventions limited to addressing excessive volatility.”

At the end of May, the CBK lifted the Central Bank Rate (CBR) for the first time in seven years moving the benchmark lending rate to 7.5 from seven per cent.

The rate hike was as the reserve bank preluded an inflation rate higher than the upper target of 7.5 per cent with its fears being confirmed in June’s inflation print of 7.9 per cent.

Higher interest rates by the CBK have been interpreted as an attempt to counter any demand-driven factors to the cost of living as the government works to cool a heated economy.

Nevertheless, analysts who have also backed further rate hikes by the CBK say a higher benchmark interest rate would serve to incentivise holdings in Shilling denominated assets to help cushion the local currency from a greater rate of depreciation.

The Kenya Shilling has so far shed an estimated 4.8 per cent against the US dollar at the start of 2022 to exchange near the Ksh.118.5 mark as of Tuesday.

“When you raise interest rates, you attract foreign investments into the country and these investments come in the form of foreign currency which is one of the fast and quicker policy effects,” stated George Kamau, a Senior Portfolio Manager with ICEA Lion Asset Management.

The Central Bank of Kenya (CBK) stages its next Monetary Policy Committee (MPC) meeting on Wednesday next week.