Shilling in slight gain as CBK maintains rate

The shilling strengthened slightly Wednesday after the Central Bank of Kenya (CBK) maintained the policy rate at 11.5 per cent on Tuesday.

Thomson Reuters data showed the currency closed selling at 105.50 units to the dollar compared to Tuesday close of 105.80 – 30 cents stronger.

However in the course of trading on Wednesday, the shilling weakened to 105.75 units to the greenback at the lowest and 105.20 units at the highest.

At the opening of markets Wednesday morning, CBK data showed the local currency traded at 105.56/66, a stronger position than the previous day’s close of 105.70/80. But it strengthened further by the time markets closed.

CBK’s Monetary Policy Committee (MPC) – which sets the benchmark rates – has held the Central Bank Rate (CBR) at 11.5 per cent since July.

The MPC justified the action saying overall inflation remained close to the five per cent target and there was adequate foreign exchange support.

The rate-setters argued that the current level of Sh655 billion ($6.2 billion) in forex reserves and the Sh65 billion ($610.7 million) so far approved for the country by the International Monetary Fund (IMF) offered support to the shilling.

READ: Monetary team retains policy rate at 11.5pc for the third time

However, Standard Chartered Africa Research managing director Razia Khan said in a statement that the CBK may have to tighten further before the end of the year if food prices rise and the global conditions worsen.

The US Fed is expected to raise interest rates before the end of the year, having delayed the action in its meeting last week.

“The CBK is concerned about the potential pressure on food prices as a result of El Nino rains, as well as further Kenya shilling volatility on the back of global events. Given this, we still think there is room for a rate hike of 50 bps in November, should global pressures on the Kenya shilling resurface,” said Ms Khan.

An increase of 0.5 percentage points would bring the CBR to 12 per cent.

In its statement on Tuesday, the MPC said the pressure on the exchange rate seen in August and early September had mostly come from recent global events, including the devaluation of the Chinese yuan and the strengthening of the dollar.