Inflation fears as shilling weakens to 3-month low

The shilling hit a three-month low Wednesday, triggering fears of fresh rises in consumer inflation.

Persistent weakness of the currency now poses the risk of pushing up inflation while subjecting households, especially the low-income ones, to deeper misery of more expensive import items such as oil and food.

The country’s inflation rate is already under watch, having climbed to 4.35 percent in March from 4.14 percent in the previous month — mainly on the account of a sharp rise in the cost of food.

Traders attributed the shilling’s performance yesterday to maturing government securities.

“The Kenyan shilling was seen under pressure against the dollar on Wednesday due to surplus liquidity in the local money markets and dollar demand from merchandise importers,” said Reuters, quoting traders.

As at 2.40 pm, Reuters data showed that the local currency was trading at 101.30 units, the weakest level since January 24 when it stood at 101.41 against the greenback.

The strongest position the shilling has been this year was at 99.61 on March 12, and is now 1.7 per cent down since then.

The currency is only stronger when compared to the beginning of the year it stood at 101.83 to the dollar.

On Wednesday, the Kenyan currency stayed under pressure—firming a trend from Thursday last week when it hit a surprise 101.09 to the greenback.

“Market chatter alludes to range bound trading [for the shilling-dollar pair], with a bias towards a weaker shilling if the liquidity in the money market space perseveres,” the Commercial Bank of Africa (CBA) had said in a note on April 8.

Surplus liquidity

Analysts at Genghis Capital, an investment bank, said that the surplus liquidity of the shilling was a result of frequent maturing of securities deposited with the Central Bank of Kenya (CBK).

The weakening trend intensified after midday with the agency reporting that earlier on, at 12 noon (in Nairobi), commercial banks quoted the shilling at 101.15/35 per dollar, compared with 101.10/30 at Tuesday's close.

The shilling’s liquidity was also underlined by the drastic fall in interbank rates which hit below one percent as of last Friday, according to CBK data.

The interbank overnight rate sank to 1.48 percent as of April 12, the lowest since February 14 this year when it was at 1.25 percent.

On April 12, the rate went as low as one percent for some of the borrowers on the bank-to-bank market while those who acquired the cash at the most expensive rate paid 3.5 percent.

The recent spike in liquidity started earlier in the month. There was a sudden increase in liquidity on April 5 when the interbank rate fell by half to 1.84 percent from 3.56 percent on April 4.

Analysts said that the liquidity has to do with the situation in the money market where investors are unable to find attractive rates on the longer section of the yield curve.

This means that major investors in government securities are going for short-term securities such as repurchasing agreements (repos) offered by the CBK, which mature either overnight or in a matter of few days.

The repos are intended to be instruments for the Central Bank to use in reducing liquidity in the market when it’s in excess, but they normally mature mostly in a day or at most within a week – compelling the CBK to go into the market frequently to maintain the level of liquidity it considered optimal.

“The mopping activities of the central bank are such that banks are oversubscribing to them as seen in the repo market.

Low rates

Instead of banks going for long-term paper, where they are oversubscribed and offered at low rates, banks are going for these repos.

In a day or two, the securities mature and situation returns to the original so there is a lot of liquidity pushing the currency to be weak,” said Churchill Ogutu, a research analyst with Genghis Capital.

The shilling’s performance will stay in focus at least in the short-term as the country faces the vagaries of a prolonged dry spell that may necessitate the importation of items such as food.

Millers and traders have reported maize shortages , which have seen prices of the commodity rise by up to 40 percent in just two weeks.

Early this week, a 90 kilogramme bag of maize was retailing at a high of Sh3,200 from Sh2,000 previously, with processors expecting that prices would continue to rise.

A weaker shilling also means that imported items such as oil would become more expensive -- triggering an increase in transportation and industrial production costs, with consumers shouldering the burden.

Petrol, diesel and kerosene prices rose to Sh106.60, 102.13 and Sh102.22 respectively, according to a schedule released by the Energy Regulatory Commission (ERC) on Sunday.

The monthly review saw the prices of both petrol and diesel go up by Sh5 while the cost of kerosene, which is mainly used by majority of poor households, went up by Sh2.76.