September 24, 2018

Shilling Slides against Dollar as Central Bank Maintains Base Rate

Kenya shilling

By Etaarifa Contributor

The Kenya shilling has today lost ground against the dollar, reversing a gaining streak witnessed in the last three days. The shilling closed the day trading at 101.20 units against the dollar, having weakened from 101.1 units yesterday.

According to experts, the shilling is reacting to the decision by Central Bank’s Monetary Policy Committee (MPC) to hold the base lending rate at 11.5 percent yesterday, amid high expectations that it would be hiked for the third time in two months.

The MPC’s decision to hold the rate was a surprise to the market as a number of commercial banks had already sold dollars in anticipation for a rate hike. As a result, today’s market activity was dominated by the lender buying back the dollar. In today’s trading session, the shilling hit an intra-day low of 101.40 units to the dollar on grounds of tight liquidity, even as overnight rates stay above 20 percent. The Central Bank plans to mop up Ksh.12 Billion from the market to boost the currency at the close of this week.

Since June, the Committee had raised the CBR by 300 basis points in a bid to stem the depreciation of the Kenyan currency. The Committee noted that the rate increase had yet to be fully transmitted to the economy particularly the rise in Kenya Bankers Reference Rate (KBRR) which takes effect in August.

Supporting the decision to leave the benchmark rate unchanged, inflation in July eased to 6.6 percent from 7 percent in June – with lower food prices outweighing increases in fuel prices as well as pass-through effects of a weak currency. However, rising to 4.7 per cent from 4.6 per cent in June, non-food non-fuel inflation inched closer to the MPC’s 5 per cent inflationary target.

The Committee noted persistent widening of the current account deficit, as imports of capital goods rose and earnings from exports declined, translated in increased forex volatility in early July when the shilling depreciated by 3.6 percent month-on-month against the dollar – highest monthly depreciation level in 2015.

Despite the shilling remaining depressed, the Committee noted its July Market Perceptions Survey, returned positive outlook on foreign direct investment and expected recovery of key sectors of the economy with early indicators of improvement in tourism and agriculture sectors. The Committee also observed CBK’s FOREX reserves of USD 6.4 Billion were adequate to provide buffer against short-term shocks.

The Committee also noted that although global economic growth is projected to gradually pick-up in the second half of 2015, key risks such as; uncertainty around the timing of the increase in U.S. interest rates, fall in equity prices in China and the debt crisis in Greece, have led to heightened uncertainty and increased instability in the global financial markets.

The Committee set its next rate review date for September 2015.

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