The Central Bank of Kenya (CBK) Tuesdayday mopped up Sh35 billion from the money market as high liquidity saw the shilling weaken to a four-year-low of 104.20 units to the dollar.
CBK swept the cash through repurchase agreements (repos), where lenders flush with shillings offered Sh43.35 billion out of which the regulator took its target of Sh35 billion.
Forex traders pointed at excess liquidity as a major cause of the shilling’s weakness, further fuelled by the normal end-of-month spike in dollar demand by importers.
The shilling had opened trading Tuesday at an average of 104.07 units to the greenback, but continued to come under pressure weakening to the 104.20 level that was last recorded in October 2015 when a government cash crunch caused a spike in interest rates and a swing in the exchange rate.
Forex bureaus were selling dollars for as much as 105 shillings on Monday, CBK data showed.
“The depreciation is a result of a number of factors such as the highly liquid market, rising dollar demand and we are also seeing inflows from flower exports coming in a bit lower.
"Interbank market volumes are also low indicating that banks are liquid at the moment,” said a forex dealer.
CBK governor Patrick Njoroge last week pointed to the excess liquidity in the market as the chief cause of the weakening of the shilling this month, even as he sought to allay concerns over the exchange rate by pointing to the forex reserves that the regulator can deploy to fight volatility.
“In effect what happened over this period, in addition to higher liquidity, there was more demand of foreign currency relative to the inflows that were coming in. That is what led to depreciation pressure,” said Dr Njoroge in the Thursday post-Monetary Policy Committee briefing.
Mopping up or injecting liquidity is one of the tools at CBK’s disposal when fighting exchange rate volatility.
The regulator can also buy or sell dollars into the market to rebalance supply and demand, although it does not disclose when it does so or the amounts involved.
The official forex reserves fell by $179 million (Sh18.6 billion) last week to $9.57 billion (Sh993 billion), pointing to possible sale of dollars to tame volatility of the shilling.
Dealers said that the CBK has largely kept out of the dollar market this week.
If prolonged, however, the current round of depreciation of the shilling is likely to negatively impact household budgets, mainly through higher energy costs and increased cost of transport that eventually filters through to the price of goods.
In the July fuel price review, the adjustment for inflation on excise duty meant that Kenyans missed out on the benefit of lower crude prices in the international markets.
The price of petrol went up by Sh0.29 per litre to Sh115.39, while diesel fell by Sh0.88 to Sh103.88 in Nairobi.
A weaker shilling will further weigh on the price of fuel in the next review set for two weeks from now.
The price of food— particularly the staple maize flour— has also been going up and, with the likelihood of maize imports, a weak shilling will only add to the cost borne by consumers.