CBK moves won’t halt shilling’s fall, economists say

The Central Bank of Kenya’s (CBK) recent raising of the policy interest rate will not prevent further depreciation of the shilling, economists and fund managers polled by Nairobi-based financial research company HTM Capital have said.

The analysts surveyed from different institutions said the dollar would continue gaining so long as the American economy continues to improve, thereby pushing the value of the local unit down.

Economists expect the US Federal Reserve to raise interest rates by September, a move that will see investors withdraw their cash from other economies heading for America.

“The expected (policy) rate hike may curtail the shilling slide, but Kenya’s weak economic fundamentals with a ballooning current account deficit, declining foreign exchange reserves and general global dollar strength is expected to keep the local currency vulnerable,” said HTM Capital in a newly released report.

CBK has increased its interest rate by three percentage points in the last two months to push its indicative rate to 11.5 per cent as the local currency depreciated to surpass the Sh100 to the dollar mark.

CBK’s Monetary Policy Committee (MPC) is set to meet again early next month, with analysts polled by HTM Capital saying they expect further policy interest rate raises in the three months to September.

“Given the two recent rate hikes, I expect the MPC to pause and see how it will influence the exchange rate given that there is normally a lag period of two months or more for monetary policy signals to transmit to the real economy.

‘‘If the shilling continue to slide, they will need further rate hikes,” said one of the analysts polled in the report.

CBK has also been urged to accept even expensive bids for Treasury bills and bonds in order to attract foreign investors to the fixed-income instruments thereby increasing dollar inflows into the country. But the analysts are sceptical about the transmission of the signal issued by the MPC.

“Poor co-ordination between various instruments the CBK uses disables the transmission mechanism intended to achieve the desired results,” reads part of the report.

READ: Overvalued shilling may hit 110 to US dollar by year end

The increase in interest rates is expected to hold back economic growth in the second half of the year as input and financing costs shoot up.

Input prices will be affected by the exchange rate while financing costs will rise owing to the increase in the price of money by the MPC as it fights to tame the volatility of the shilling.

READ: Steep price increases loom as the shilling defies CBK action

The shilling has depreciated by 13 per cent since the beginning of the year, and stood at just over Sh102 to the dollar Thursday.

The central bank has made efforts to shelter households and businesses from the increase in interest rates using the Kenya Banks’ Reference Rate (KBRR).

The KBRR is a standard base that all lenders regulated by CBK have to use to determine their effective rate. The central bank increased the base rate by 1.33 percentage points to 9.87 per cent with banks announcing an equivalent increase in their lending rates effective August.