Focus on CBK as shilling continues to slide against dollar
Posted Tuesday, January 10 2017 at 21:00
- CBK has stopped forex traders from making comments “that can influence the currency to decline outside of normal market fundamentals."
Stanbic Bank regional economist Jibran Qureishi said market fundamentals do not point to sustained pressure on the shilling -- indicating that companies that are building up their dollar position may burn their fingers.
“This being an election year there isn’t any compelling empirical evidence to suggest that the exchange rate should come under severe pressure. In fact, if companies eventually adopt a wait and see approach, import demand could remain steady,” Mr Qureishi said during Tuesday’s release of the bank’s 2017 economic outlook report.
“The IMF stand-by credit facility along with potential new external loan issuances in 2017 may yet help provide adequate ammunition for the CBK to ensure that any weakness in the exchange remains orderly.”
Last week, the Central Bank grew its reserves by $87 million (Sh9 billion) to $7.06 billion (Sh734 billion) even as it remained active in the market to support the shilling.
The current reserve level, however, represents a decline of $686 million (Sh71.3 billion) over three months, attributable to the currency support activity in the turbulence that followed November’s election of Donald Trump as US president, revaluation and foreign debt repayment.
How the CBK’s Monetary Policy Committee (MPC), which is scheduled to meet at the end of this month, will tackle the exchange rate turbulence should it persist remains to be seen.
The MPC has been tipped by a number of analysts to hold the base lending rate steady at 10 per cent, but should inflation be on the rise due to a raging drought and exchange rate turbulence there will be pressure to tighten the policy, with higher bank lending rates as the knock-on effect.
Mr Qureishi said that headline inflation is likely to rise until April, before easing in July after which a more durable decline in prices in the final quarter of 2017 is expected.
Food prices are the key driver of the expected inflationary pressure, making the persistence of drought a key factor in pricing going forward.