The Central Bank of Kenya (CBK) has revealed why it adopted a new formula of reporting on foreign currency rates, dropping estimations that had been blamed for the wide variations in the rates quoted by the apex bank and commercial lenders.
The apex bank has been publishing an exchange rate based on the weighted average rate from January of all interbank transactions executed on the previous day—a shift from the past when it published indicative rates provided by major players in the interbank market where lenders trade currencies and other currency derivatives directly between themselves.
“There has been a gap between the interbank rate, where transactions take place, and what the CBK publishes as the interbank rate.
“We decided to only have one rate starting in 2024 and are only publishing the rate at which transactions take place to avoid this parallel rate,” said CBK governor Kamau Thugge on Thursday.
Traditionally, there are two official exchange rates with the first representing the forex interbank rate through which hard currency transactions are conducted among banks.
Bank-client rates, meanwhile, inform rates from transactions between commercial banks and clients, which are also regarded as retail rates.
The divergence between the regulator-published rate and the mean interbank rate resulted in the CBK dollar rate widely differing from the effective dollar rates, including executed bank-client dealings.
At the height of the foreign exchange crisis in March last year, the difference between the CBK published rate and bank-client selling rates had, for instance, widened to more than 10 units.
This saw the Central Bank published dollar rates and bank-client rates differ widely, worsening what was then a dislocated market with an insatiable demand for dollars but with constrained supply.
The CBK’s shift to publish dollar rates from the weighted average rate of executed interbank transactions is part of remedial reforms to improve the supply of hard currency in the economy and set the foreign exchange regime on a sustainable path.
Other recently introduced measures have included the introduction of electronic matching systems (EMS) in the interbank market and the removal of the requirement of the maximum spread of 20 cents on indicative quotes in the interbank market.
At present, the difference between the published CBK dollar rates and quotes on bank dollar bid prices has narrowed considerably mirroring the improvement in the publishing stance.
For instance, the difference between CBK’s published dollar rate of Sh160.32 on Tuesday was only four shillings or units less than the average bid quoted by Equity, NCBA, I&M, and Stanbic Bank, which stood at Sh164.37.
This week’s action by the Central Bank to raise the benchmark lending rate from 12.5 to 13 percent is expected to further lift the foreign exchange rate by encouraging foreign portfolio inflows, complementing recent hard currency flows from multilateral lenders.
On Thursday, the CBK doubled down on the over-depreciation of the local currency indicating it stands ready to take more steps, including interventions in the foreign exchange market to prop up the local unit.
“CBK policy on the exchange rate is to allow it to be determined by market forces, but we do intervene when there is excessive volatility. It is my view now that the exchange rate has overshot the equilibrium rate and there could be scope to support the exchange rate going forward,” said Dr Thugge.