CBK sees greater capital outflows from higher US rates

The Central Bank of Kenya (CBK) expects to see greater capital outflows by foreign investors as developed economies up the ante on monetary policy tightening.

On Wednesday for instance, the US Federal Reserve lifted its funds rates/benchmark interest rates by three quarters of a per cent or 75 basis points at its September meeting.

The rate hike are expected to lift interest rates on US government securities along with the value of the US dollar making dollar denominated assets attractive to investors.

As a spill over effect, the attraction of investors to the dollar assets is set to see foreign investors pull funds from emerging and frontier markets (Ems & FMs) such as Kenya.

“There will be a huge outflow of capital from our countries. Obviously this complicates not just the external position but also the fiscal and investment position,” CBK Governor Patrick Njoroge said on CNN’s Quest Means Business, Wednesday night.

Kenya has already seen considerable portfolio outflows from foreign investors since the start of the rates hiking cycles in the second quarter of 2022.

For instance, foreign investors have remained net sellers at the Nairobi Securities Exchange (NSE) with a total net selling position of Ksh.17.2 billionas of the end of August.

The selloffs primarily triggered by the rate hikes have sent stock valuations at the NSE lower.

CBK Governor Patrick Njoroge expects the higher interest rates in developed economies to pull hard on capital in the country as an immediate impact even as it drives down the value of the Kenyan Shilling and imported inflation over the medium term.

CBK official foreign currency reserves have for instance fallen to less than four and half months (4.5) months of import cover in the year so far with the local currency shedding 6.6 per cent in value against the US dollar.

On Tuesday, the CBK quoted the Kenyan Shilling at Ksh.120.49 against the green buck.

Dr. Patrick Njoroge has called on safety net from developed economies to cushion the rest of the world including assurance of capital access from International Financial Institutions (IFIs) and bilateral sources.

“The solutions include a little more consideration for tightening the safety nets of our countries, these safety nets relate to IFIs where we go for financing when capital markets are closed,” he added.

CBK is expected to stage its bi-monthly monetary policy committee (MPC) meeting on Thursday next week where the reserve bank is expected to decide its new benchmark interest rate, moving it up or keeping it at the current rate of 7.5 per cent.

“We are between a rock and a hard place. What is clear is whatever we do, we will have to do it in the context of the data coming to us,” said Dr. Patrick Njoroge.

The wave of rate hikes from Central Banks in developed economies is expected to continue later in the week with the European Central Bank (ECB) and the Swiss National Bank set to lift their benchmark interest rates to combat inflation.

Kenya’s inflation rate stands at 8.5 per cent or about 100 basis points above the rate of CBK’s benchmark interest rate.