Bank dollar rates ease as shilling stages rare rally

Car& General has cut its dollar-denominated borrowings. PHOTO | SHUTTERSTOCK

Commercial bank dollar rates eased notably in the past week, coinciding with a rare rally by the Kenyan shilling against the greenback.

Data compiled from five commercial banks showed that the lenders on Friday quoted no more than Sh164.50 to their clients seeking the hard currency. For example, Stanbic Bank quoted dollars at Sh164.50, the same rate as Cooperative, Diamond Trust, and Equity banks.

KCB had a lower quote than its peers and sold dollars at Sh163.25.

The bank dollar rates on Friday are in sharp contrast with January 22, 2024, when the Kenyan shilling peaked at a low of Sh161.35 against the US dollar as per indicative rates by the Central Bank of Kenya (CBK).

I&M Bank had for instance quoted its dollar selling rate at Sh165.9 on January 22 while NCBA had the same quote at Sh165.2.

Multiple interviews with players in the foreign exchange market revealed that the market has taken confidence from recent hard currency inflows from recent disbursement by multi-lateral lenders and high foreign investor interest in the recently issued infrastructure bond.

“There have been big-ticket foreign investors coming into our bond markets as the real yields are now positive given the high interest rates. People are also starting to get the sense that our domestic exchange rate is beginning to turn as we see a lot of cash coming in,” noted a player in the foreign exchange market.

Sources also revealed a meeting between the CBK and bank executives whose talks centred on the forex exchange market.

The Kenya Bankers Association (KBA), the banking sector lobby, remained mum about the meeting but cited the fall in the bank dollar rates to the attainment of equilibrium between the demand and supply for dollars.

“The dollar rate will respond to forces of supply and demand and market sentiments. These forces work until an equilibrium is reached reflecting the current rate the market is exchanging currencies at,” KBA Chief Executive Officer Habil Olaka said on Friday.

The Kenyan shilling has marked a notable rally against the US dollar as noted by CBK’s indicative rates- the average weighted rate for forex dealing in the interbank market.

For instance, after peaking at a low of Sh161.35 on January 22, the Shilling has rallied to Sh160.57 as per CBK data at the end of trading on Thursday.

None of the interviewees for this story suggested a right turn for the local currency indicating hesitance and a wait-and-see stance on the market developments.

Over the last year, the CBK has undertaken various measures to revitalise the foreign exchange market, including the reopening of the market in May and the removal of 20 cents margin for bid prices.

However, the International Monetary Fund (IMF) has dismissed any developments from the reforms, describing the interbank foreign exchange market as dormant in a January report.

“The real exchange rate has depreciated to a five-year low, while the interbank FX market remains dormant. Spreads in the bank-client market remain large despite some tightening recently, on the back of strong excess dollar demand, partly reflecting increases in FX deposit rates,” the IMF noted.

The multilateral lender further noted that the CBK had made some conservative net dollar purchases, reversing a previous trend of the bank selling dollars to banks.

Skeptics nevertheless have expressed caution over the potential return of controls in the market by the CBK and the return of dollar sales.

CBK dollars held as official foreign currency reserves are nevertheless deemed as precious as Kenya moves towards its record Sh321.1 billion ($2 billion) Eurobond bullet payment at the end of June.

“I don’t think the CBK has much power to take control of the Forex narrative by selling dollars. Reserves are now very precious as we move towards the Eurobond maturity,” noted a market analyst.

The IMF has described Kenya’s foreign exchange rate regime as a crawling peg, suggesting the coordinated buying and selling of (other) currency to keep the (home) currency within a determined range.

In December, CBK Governor Dr Kamau Thugge suggested the Kenyan Shilling had overshot its expected levels warranting the tighter policy stance to attract foreign flows into the domestic markets including bonds.

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