Shilling weakens after CBK retains lending rate

Money Markets

The Central Bank of Kenya building in Nairobi. PHOTO | FILE 

By CHARLES MWANIKI, cmwaniki@ke.nationmedia.com

In Summary

• Commercial banks quoted the currency at 101.30/40 to the dollar by mid-afternoon, a weakening from Wednesday’s closing levels of 100.75/85.
• Analysts expect relative stability seen in the market in the past two weeks to continue.

The shilling weakened half a percentage point on Thursday as the market reacted to the widely unexpected retention of the base lending rate by the Central Bank of Kenya (CBK) but analysts expect the exchange rate to stabilise going forward.

Commercial banks quoted the currency at 101.30/40 to the dollar by mid-afternoon, a weakening from Wednesday’s closing levels of 100.75/85.

Traders said that institutions, especially banks, had sold dollars during the first two days of the week anticipating the Monetary Policy Committee (MPC) would increase the base rate and in turn strengthen the shilling further.

They were actively buying back some of the dollars Thursday, hence the weakening of the shilling.

Market analysts said the movement of the exchange rate on Thursday could be temporary, with the relative stability that has been seen over the past two weeks expected to continue.

“The rate was held steady bearing in mind that the shilling was stable, therefore we do not expect any reaction, the status quo will hold.

Nonetheless, there may be a bit of pressure on the shilling once maturities start filtering in next week as liquidity in the money market is likely to ease,” said Vinita Kotedia of Genghis Capital. 

Traders expect the worst of the volatility that had pushed CBK to make several direct dollar sales to commercial banks in recent months and issue a circular controlling the daily trading volumes by banks is now over, at least for the short term.

According to Ms Kotedia, the holding of the rate at 11.5 per cent should also lead to stability of the yields in the fixed income securities market.

The liquidity in the money markets has been tight due to active mop-up by CBK, resulting in the overnight lending rate between banks rising to a high of 21.26 per cent.

This has an effect on borrowers, especially those taking up short-term overdrafts, who might be required to pay even higher rates.

READ: CBK maintains base lending rate at 11.5 per cent

The MPC’s decisions over the past two months have attracted some support, with analysts saying that the regulator has the unenviable task of balancing between a stable currency and the need to maintain economic growth.

Some analysts said the latest decision to hold off increasing the base rate will allow the economy to pass through the effects of the two rate increases in June and July, sentiments that were also expressed by the MPC in its meeting on Wednesday.

“We believe there are little signs to show that the Kenyan economy is overheating. Credit growth continues to edge down whereas growth in non-machinery imports remains lacklustre following rapid growth in 2010-2011 periods, which was an interval characterised by robust economic activity,” said CfC Stanbic economist Jibran Qureishi in a note.

The lack of credit growth, coupled with the tight liquidity in the market, is seen as one of the major reasons the CBK avoided raising the cash reserve ratio for commercial banks-as some analysts had suggested it could- which would reduce the cash in circulation and that available for onward lending.

According to Mr Qureishi, non-machinery imports have also declined 10.8 per cent year-on-year while forex reserves during the same period are also down quite significantly, suggesting that the pressure on the balance of payments has been due to capital outflows.