Central Bank of Kenya headquarters. The shilling is likely to remain under pressure — having hit a low of 91.70 to the dollar early on Wednesday. Fredrick Onyango
A mismatch between key lending rates in the money market has created room for traders to make easy money by borrowing from the Central Bank of Kenya, only to sell the money back to the institution at a profit.
The practice — called arbitrage — arises from Treasury Bill rates being higher than the Central Bank Rate, a supposedly punitive interest rate at which the monetary authority extends credit to banks in financial distress. Mr Razia Khan, the head of Africa Research at Standard Chartered Plc, said during a visit to Nairobi that CBK needed to raise the CBR which is now at 6.25 per cent, about a third lower than the 91-day Treasury Bill of 9.02 per cent.
It means a trader can make Sh2.80 for every Sh100 lent to government, increasing the level of government debt that has ultimately to be paid by the taxpayer. “How high has the policy rate got to go to match the rising rates on T-bill? I think pretty high. In fact, 50 basis points every two months at this time may be too moderate given the scale of the problem,” said Ms Khan.
A tightening, she said, would also prevent further fall of the shilling exchange rate, the main cause of rising inflation outside the supply side shocks related to high prices of international commodities like oil and food.
“Fundamentals indicate that there is really no good reason for the local currency to depreciate to the extent it has in the past few months. But market psychology is such that it has come to expect an increasingly weaker shilling, sustaining the momentum in the currency fall,” Ms Khan said.
The currency is likely to remain under pressure — having hit a low of 91.70 to the dollar early yesterday — unless interest rates rise steadily above the inflation rate, which has averaged 9.22 per cent for the past five months of the year. For the three months to May, the annualised inflation stands at 11.4 per cent. The high inflation rates means real interest rates are negative, wiping out any gains on the economic front. Ms Khan said she projects that inflation will peak at between 18 and 22 per cent based on the depreciating shilling and rising commodity prices.
Titus Karanja, an investment manager at Coop Trust Services, said experience showed that negative interest rates could persist for long without the central bank doing anything about it.
Worse situation
In 2008 and 2009, inflation averaged 16 and 11 per cent, respectively, which was higher than coupon or interest rates on most of the t-bills and bonds issued by the government.
The situation was made worse by the current account deficit — which shows the difference between exports and imports as well as inter-country transfers — persisted and even became worse.
At the end of December 2010, the current account deficit widened to $2.3 billion from $1.6 billion a year earlier, amounting to 30 per cent deterioration. The disparity is an indication that the value of Kenyan imports has been much higher than inflows from exports.
