(Bloomberg) -- The Kenyan shilling’s depreciation of almost 20% against the dollar this year is overdone, the East African nation’s central bank governor said.
“The exchange rate has depreciated more than was necessary to re-establish a stable but competitive exchange rate,” Central Bank of Kenya Governor Kamau Thugge told journalists on Tuesday evening, after unexpectedly raising interest rates by 200 basis points.
Previous central bankers had depleted the nation’s reserves to try and defend the shilling, selling close to a cumulative $2.8 billion through May of this year, including $1.3 billion in 2020 and almost $650 million in 2021, said Thugge, who was appointed in June.
That meant that when US interest rates began to rise, “we were in a situation where we didn’t have any external buffers to be able to just mitigate the impact of higher foreign interest rates on the shilling exchange rate,” he said.
Tuesday’s 200 basis-point rate hike to 12.5% was the largest increase since 2011 and was aimed at supporting the shilling, the bank said. The currency fell against the dollar for the 30th consecutive month in November and is poised for its worst year since 2008. It weakened 0.1% to trade at 153.48 to the dollar by 10:00 a.m in Nairobi on Wednesday.
Read: Top Banker Says Kenya Shilling’s Weakening Has Peaked
The central bank’s latest hike and financing from multilateral institutions mean that the outlook for the shilling is improving, said Mohamed Abu Basha, head of macroeconomic research at Cairo-based EFG Hermes. The International Monetary Fund last month granted staff-level approval for an additional $938 million in funding to boost Kenya’s reserves.
But higher interest rates won’t come without a cost, said Deepak Dave, an analyst at Toronto-based Riverside Advisory.
“The raising of the interest rate by the MPC shows that protecting the value of the shilling and lowering the Kenya shilling cost of Govt of Kenya debt now takes priority over the mortal wound the economy will suffer from such a high rate,” he said.
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