Central Bank of Kenya’s has unveiled a big interest rate hike aimed at stabilising the shilling currency , whose depreciation has spurred price pressures, curbed foreign investment and affected debt-servicing.

The central bank raised its policy rate by two percentage points to 12.5 per cent, its first hike since June when it raised it by a percentage point.

“There is need to adjust the monetary policy stance to address the pressures on the exchange rate and mitigate second round effects,” the central bank’s Monetary Policy Committee (MPC) said in a statement on Tuesday.

“This will ensure that inflationary expectations remain anchored, while setting inflation on a firm downward path towards the 5.0 percent mid-point of the target range.”

Inflation dipped to 6.8 per cent year-on-year in November from 6.9 per cent in October, with the central bank saying on Tuesday that exchange rate depreciation had contributed about 3.0 percentage points to the November reading.

The shilling is down more than 19 per cent against the dollar this year, having struck repeated all-time lows along the way.

“The MPC … stands ready to further tighten monetary policy as necessary to ensure price and exchange rate stability are achieved,” the central bank said, adding its MPC would meet again in February 2024.

Razia Khan, chief Africa and Middle East economist at Standard Chartered Bank, said there had been pressure from the International Monetary Fund and World Bank to tighten policy meaningfully.

“Market interest rates were already well in excess of the policy rate, so it’s questionable whether this has a near-term impact,” she said.

Kenya is being watched closely to see how it handles the settlement of a $2 billion Eurobond that is maturing in June next year.

Central bank governor Kamau Thugge told reporters that authorities were expecting $300 million from regional bank Trade and Development Bank in the first two weeks of December and that would be used to buy back part of the Eurobond.

Thugge said Kenya expected a further $1.25-$1.5 billion in budget support from the World Bank early next year.

• A Reuters report