CBR reduction will depress shilling, Central Bank told

Central Bank’s Monetary Policy Committee (MPC) could expose the shilling to the risk of rapid depreciation if it lowers the policy rate below the eight to nine per cent range by early next year.

Analysts say that the currency is exposed to a large import-export gap and high oil prices, in the absence of high interest rates and the frequent mopping of the cash from financial markets.

“We see a major risk to the Kenya shilling if the Central Bank moves too fast to reduce interest rates. We expect that by January, the (Central Bank Rate) CBR will be no lower than eight or nine per cent because we still have serious risks and we could go back to the volatility of last year,” said StanChart head of regional research for Africa Razia Khan in Nairobi Thursday.

Ms Khan said that Kenya would need to continue carrying out structural reforms that give its exports competitiveness globally in order to narrow the current account gap — which is mainly a result of imports being nearly triple the exported value.

The analysts conceded that infrastructural investments would make businesses more competitive and improve exports relative to imports demand.

“While the country invests in infrastructure, you can expect the import of materials to continue putting pressure on the shilling. At the same time, the import of oil exploration equipment should also pose a similar threat,” said Ms Khan.

She said that the shilling could leverage on portfolio inflows that have been entering the securities markets. Current data shows that foreign investors have brought a net of more than Sh9 billion in the first eight months of this year.

So far, the shilling has defied the decline in interest rates, thanks in part to CBK mop-ups that topped nearly Sh60 billion this month while forex reserves have hit over $5.147 billion.

READ: Shilling gets cover as forex reserves hit record levels

Analysts said that the shilling has remained strong in the short run due to CBK’s open market operations (OMO).

“We see the shilling depreciating to Sh88 in coming months. Kenya is exposed to what is happening at the EU region. In the run-up to the General Election coming in March, there is likely to be pressure for depreciation,” said Yvonne Mhango, sub-saharan economist for Renaissance Capital in a phone interview from Johannesburg.

The CBK dramatically escalated the mop-up of excess local currency liquidity in the market on the day the CBR cut to 13 per cent from 16.5 per cent last month.

READ: Central Bank moves to stimulate growth with cheaper credit

CBK nearly doubled the average daily mop-up to Sh7.8 billion from September 5, compared to an average of Sh4.25 billion in the first few days of the month, according to data from Reuters.

In Thursday’s opening of markets, the local currency was at Sh84.2139 to the greenback, stronger than the opening of Sh84.3872 recorded the day after the CBR was slashed last week.

On Wednesday, for example, the CBK sucked Sh10 billion (or $119 million) from the market by buying off shillings — thus making it scarce relative to the hard currency.

Reserves

On the day the policy rate fell, CBK mopped up Sh15 billion from the market after suspecting that the easing would cause some jitters among forex holders targeting fixed-income securities.

Not surprisingly, the Treasury bill rates have been falling by the week with the latest auction showing that the rate on the 182-day paper is now 8.993 per cent, down four percentage points from just a month ago.

Forex reserves have also risen to $5.147 billion or 4.16 months of import cover — having increased by $26 million in the week ending September 7.

“The usable official foreign exchange reserves held by the Central Bank increased from $5.121 billion (equivalent to 4.14 months of import cover) as at August 30, to $5.147 million (equivalent to 4.16 months of import cover) in the week ending September 6,” said the latest CBK weekly bulletin.

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