CBK: Tighter money policy has stabilised the Kenya shilling

Tighter monetary policy has stabilised the shilling and anchored inflation in the government’s preferred band between 2.5 and 7.5 percent despite a November spike to the top of the range caused by heavy rains, the central bank governor said on Tuesday.

Patrick Njoroge also told Reuters that hiking the benchmark interest rate and measures such as closer coordination with the Treasury on fiscal policy would help create sustainable growth in future, even if the short-term impact curbed output.

The governor, who took office in June, raised the bank’s benchmark rate by 150 basis points to 11.5 percent shortly after taking charge. That followed a similar hike a month earlier. Open market operations have also mopped up shilling liquidity.

“This was effective in terms of anchoring inflation, and at the same time it helped in terms of stabilising the shilling,” he said, adding that inflation was the main focus.

Year-on-year inflation jumped to 7.32 percent last month from 6.7 percent in October after heavy rains washed away roads and prevented produce reaching markets.

But the Yale-trained governor said core inflation, which strips out more volatile items like food, had slipped, encouraging expectations the headline rate would follow.

“Our expectation is that inflation will remain within bounds of 5 percent, plus or minus 2.5 (percentage points),” he said, adding he would like it around 5 percent or even less if Kenya was to align it “with the inflation of our trading partners”.

For now, he said rain rather than aggregate demand was driving inflation, adding: “I wish I could say something about controlling the weather.”

DAMAGING VOLATILITY

After plunging close to an all-time low in September at 106.80 to the dollar, the shilling has traded in a band of roughly 102.00 to 102.50 since early November.

“We are completely wedded to the flexible exchange rate regime,” Njoroge said, but added that “volatility can be extremely damaging”.

The bank had sold dollars to prevent a sharp weakening, but also bought dollars to slow any appreciation, Njoroge said.

Foreign exchange reserves rose to $6.979 billion on Dec. 3, from $6.112 billion on Oct. 1, central bank figures showed.

The governor said the rise came partly from the government’s $600 million syndicated loan, with the balance mainly coming from purchases during open market operations.

Njoroge said he was “coordinating a lot more closely” with the Treasury to align fiscal and monetary policy.

“The borrowing plan needs to be realistic and we have been working with them to make sure that is the case,” he said.

The Treasury, which has forecast a budget deficit equivalent to 8.7 percent to gross domestic product in fiscal year 2015/16, was expected to release a supplementary budget next month that reduces spending, Njoroge said without giving details.

“We are really looking more at the medium-term growth. That is what we want to anchor,” he said. “We may have very high growth at this point but if there isn’t much medium-term growth, if there isn’t much in the future, it is all a waste.”

The economy is forecast to grow 5.8 to 6 percent this year.