Shilling depreciates faster despite CBK interest rate hike

The shilling had overshot its desired level of depreciation following interventions to reset the foreign exchange market. 

By KEPHA MUIRURI More by this Author   

The Kenya shilling has depreciated faster despite the Central Bank of Kenya (CBK) raising interest rates last month to counter weakness in the local currency.

The shilling’s depreciation against the US dollar has for instance quickened to a mean of 0.16 percent or 16 cents per day since the tightening of monetary policy on December 5 from an average daily change of 0.069 percent in the month preceding the interest rate increase.

The faster depreciation of the Kenya Shilling has raised questions about the successes of monetary policy tightening as a countermeasure to foreign exchange weakness and further puts the prospects of an additional interest rate hike on the table during CBK’s next policy setting meeting next month.

Since implementing the jumbo rate increase, the Kenya Shilling has depreciated against the US dollar to change hands at Sh158.3 on Friday from Sh153.28 on December 5.

Read: Kamau Thugge: Kenya paying the price for overvalued shilling

According to analysts, the rate increase has likely borne no effects with the policy call having come in late in the unit’s depreciation cycle.

“The timing of the rate hike to address currency weakness came in too late after the damage had been done. It would have made sense if we had seen the rate hike earlier,” noted an analyst who requested for anonymity.

Last month, the CBK surprised the market as it unexpectedly raised interest rates by 200 basis points/ two percent, lifting the Central Bank Rate to 12.5 percent from 10.5 percent. In its decision, the CBK Monetary Policy Committee-MPC noted that the exchange rate depreciation had continued to exert pressure on domestic prices.

From November’s 6.8 percent inflation print for instance, CBK stated that the exchange rate depreciation had contributed to about three percentage points to the uptick in consumer prices. The apex bank also observed the rise in external debt service as an offset to desired fiscal consolidation by the government.

Read: Why Kenya’s stock market has suffered steepest losses globally

According to CBK Governor Dr Kamau Thugge, the shilling had overshot its desired level of depreciation following interventions to reset the foreign exchange market after what the apex bank alleged to have been the overvaluation of the local currency.

“We thought the shilling had been overvalued for quite some time, there has since been significant adjustments and we now feel that the shilling has depreciated enough and actually may have overshot the rate required for equilibrium,” Dr Thugge said on December 6.

→ kmuiruri@ke.nationmedia.com