CBK comes to the aid of shilling with currency injection

Money Markets

A teller counts Sh1,000 bills. PHOTO | FILE 

By CHARLES MWANIKI, cmwaniki@ke.nationmedia.com

In Summary

• Besides dollars the Central Bank of Kenya (CBK) injects Sh30 billion as tight liquidity hits banks hard.
• This comes after the currency hit a 32-month low against the greenback on Monday amidst tight shilling liquidity.
• The Central Bank had stayed out of the market last week to allow it to redistribute liquidity.

The Central Bank of Kenya CBK) Tuesday moved to address the tight liquidity and weakening local currency with injections of both shillings and dollars into the market.

This comes after the currency hit a 32-month low against the greenback on Monday amidst tight shilling liquidity.

Central Bank initially injected Sh30 billion into the money markets in reaction to a rising interbank rate that went as high as 15.5 per cent on Monday, and followed up in the afternoon by releasing an undisclosed amount in dollars into the market.

Market players consider the regulator constrained on the level of support it can offer the shilling against the dollar to which it exchanged at a nearly 32.5 months low Tuesday.

The Central Bank had stayed out of the market last week to allow it to redistribute liquidity.

“We have seen the release of dollars into the market to protect the shilling. The expectation was that the currency would not be allowed to go past the 89 level,” said Commercial Bank of Africa senior dealer Joshua Anene.

The shilling was quoted at 88.58 to the dollar in the CBK mean exchange rate Tuesday, from Monday’s 88.32. Other than the tight liquidity, end month dollar demand from key sectors of the economy has been weighing down the local unit.

The banks quotes fluctuated as the news of the currency injection hit the market. Having opened the day at an average rate of 88.75/85, the Sh30 billion injection saw it move slightly to 88.65/75 on profit taking before settling back to the lower levels.

The dollar injection in the afternoon had a bigger effect in pushing the rate lower to 88.50/60.

READ: Shilling drops to 32-month low on importer demand

Banks had borrowed Sh18.9 billion from one another on Monday to cover their positions, up from Sh15.3 billion on Friday last week, as the liquidity tightened further.

“The (Sh30 billion) injection will not create excess liquidity, but is enough to cover the present need of the market. The short covering in the interbank market has also been one of the causes of the weakening currency,” said I&M Bank head of trading Sheikh Mehran.

The banks ran a deficit of Sh41.8 billion last week in their settlement accounts at CBK in relation to the monthly average cash reserve requirement of 5.25 per cent (Sh110 billion), compared to Sh12 billion the previous week.

Delayed disbursement of government payments has been blamed for the tight liquidity, with CBK which is in charge of monetary policy forced to intervene with the shilling injection which now totals Sh68 billion this month.

“Once the government disburses payments we might see the interbank rate go to as low as five per cent in a matter of days. A lower interbank rate will, however, exert pressure on the shilling at a time when it has weakened,” said Mr Anene.