The Central Bank of Kenya sent mixed signals Wednesday as the shilling slipped to its weakest position against the dollar, reflecting the dilemma facing the institution. Photo/FILE
The Central Bank of Kenya sent mixed signals Wednesday as the shilling slipped to its weakest position against the dollar, reflecting the dilemma facing the institution. CBK had in the morning injected Sh15.3 billion into the market — the first intervention in six weeks — to improve liquidity ahead of Treasury debt auctions that saw interest rates charge higher.
The pumping of shillings into the market and increased demand for dollars across the board forced the shilling to a new record low of 97.50, the second time in two days that it had plunged to historic lows.
Single heavy buy
The CBK later stepped into the market this time to sell an unspecified amount of dollars in support of the shilling which gained close at Sh96.70, still weaker than the 96.20 level touched on Tuesday. Dealers said the currency touched a new low yesterday morning after a single heavy buy by a player in the telcom sector.
“Demand remains heavy across various industries, but a one purchase from the telcom industry significantly weakened the shilling in the morning,” said Duncan Kinuthia, a senior dealer at Commercial Bank of Africa.
The weakening currency has caused a rise in the prices of fuel and other imported raw materials resulting into higher cost of consumer goods.
This has also resulted in higher electricity bills which could further reduce the competitiveness of local export markets in regional markets.
Traders said the bank was not doing enough to support the currency adding that they had sold a very small volume of dollars to tame the heavy demand.
The Central Bank last week said it was going to defend the shilling and to help reduce the high inflation rates.
The dollar also gained due to increased investor flight away from Euro denominated assets due to the debt woes in the euro area.
Some dealers however said intervention of the regulator would have short term consequences since the shilling was suffering from excess dollar demand.
“If Central Bank comes in (to sell hard currency), you may see a reprieve, the shilling may come off its all-time low, but it’s not sustainable. The shilling will just slip back,” Kennedy Butiko, a senior dealer at Bank of Africa told Reuters Wednesday.
Mr Kinuthia said importers are buying more dollar on fears that the shilling will continue sliding. The difference between the value of exports and imports - the balance of trade - has deteriorated to its lowest level in two years, reaching negative 60.4 billion in June, according to the latest data available.
The Bank last week revised its policy rate up by 75 basis points to 7 per cent in a move to fight inflation and curb the depreciation of the shilling. However, the rates with a bearing on the market are on a rising trend.
The yield on Kenya’s two-year Treasury bond, however, rose to 13.897 per cent at Wednesday’s auction from 12.684 per cent at previously in an under-subscribed sale.
The bank had offered Sh10 billion ($103.90 million) worth of the bond and received bids worth Sh4.4 billion, from which it accepted only Sh639 million.
Traders said investors were demanding greater returns because of high inflation. The182-day Treasury bill also climbed to 12.622 percent from 11.935 per cent previously.
The bank had offered Sh4 billion ($41.6 million), received bids for Sh1.4 billion and accepted offers for Sh542.3 million.
The Bank is hoping that the declining oil prices on the international market and increased rainfall could help reduce inflationary pressure.
