CBK piles pressure on lenders to stem further shilling fall

The Central Bank of Kenya (CBK) on Tuesday pressed commercial banks to help stem the currency slide “by ending bets against the shilling for short-term profits”.

Currency dealers who attended the meeting at the CBK said the regulator was concerned that “speculation” on the local currency would have far-reaching negative implications for the whole country.

A return to the crisis of late 2011 — when the shilling fell to 107 units to the dollar leading to a surge in interest rates — would likely lead to double-digit inflation transmitted through higher costs of imports.

As happened in 2011, further weakening of the currency would lead the CBK to tightening of the market by raising interest rates, impacting negatively on economic growth.

One dealer who declined to be quoted, said the CBK would likely not intervene in the currency market with any huge amount of foreign exchange, since this could encourage further speculation even from deep-pocketed foreigners to the point of completely crashing the local unit.

The shilling gained some ground in commercial bank transactions during Tuesday’s afternoon trading after weakening in the morning hours.

The currency had fallen to 106.70 units in the morning trading session causing the CBK to intervene by selling an unspecified amount of dollars to the market.

The CBK also went into the market to mop up Sh11 billion in a bid to stabilise the currency by reducing the supply of shillings and raising the supply of dollars.

“Even though the CBK came into the market asking for Sh11 billion, it ended up getting Sh16 billion. I think the market is ready to behave in an orderly fashion as the CBK has asked,” said Ignatius Chicha, head of treasury at Citibank.

He said following the meeting in the morning the shilling appreciated in the afternoon to about 105 units to the dollar, bringing back some sense of stability in the market.

“There was a feeling that maybe the dealers had become a bit exuberant and needed to slow down and return stability to the market,” said Mr Chicha.

Other dealers said there was an expectation that the shilling would weaken in the morning as they awaited the outcome of the meeting between the CBK management and bank CEOs and their treasury heads.

When the markets opened, most of the forex bureaus sold the dollar at 107 units, but at least one of them sold it for as high as 108 units, according to data made available by the CBK. The average among the bureaus was 107.31 units during the market opening.

A dealer, who declined to be named, said he was not quite sure whether the shilling would hold at 105 units, the late afternoon rate, arguing that there was pressure from the global markets and rising demand for imports.