CBK moves in to rescue shilling

The Central Bank Thursday sold an unspecified amount of dollars in the market to help prop up the shilling, which had hit a new low of 99.05 to the greenback.

The dollar sale offered the much needed reprieve to the shilling, closing trading at 97.75/97.85, dealing speculators, who had bet on the local currency breaching the Sh100 mark yesterday, a heavy blow.

In an attempt to stem further slide of the local currency, the CBK has cautioned forex dealers from what has been termed as speculation on the shilling, a behaviour said to be causing jitters in the forex market.

“It was a bit chaotic today for the shilling, but the CBK intervened indirectly by selling dollars through brokers,” said one analyst.

On Wednesday, the CBK said it would hold its next monetary policy meeting on June 9, with analysts betting on an increase of the benchmark lending rate. In its last meeting, held on May 6, the Monetary Policy Committee held the benchmark lending rate at 8.5 per cent.

“We suspect the MPC will be eyeing to raise the CBR (currently at 8.5 per cent) to protect the Kenya shilling from further depreciation. The new meeting date also falls close to the announcement of the May inflation numbers,” noted analysts at Standard Investment Bank.  

CRUDE PRICES

It had been expected the shilling would receive much needed support from the falling price of crude oil in the international market beginning the second half of 2014. In June 2014, the price of a barrel of crude oil stood at $115 but slumped by over half following increased supply in the market against subdued demand. The currency, which had by early this year, declined to below $50 per barrel, has since rebounded to levels of $60 per barrel.

The impact of increasing petroleum prices is also likely to be filtered into the general cost of living. Electricity tariffs are set to rise given the fuel cost charge accounts for about half of power charges, which are usually passed to consumers. Already, inflation is currently at an eight month high of 7.08 per cent, close to the government’s upper limit of 7.5 per cent.

Declining export earnings following decline in tea, coffee and tourism earnings continue to weaken the shilling, which has weakened by 8 per cent against the dollar. Tea, Kenya’s largest forex earner is fetching lower prices in the global market.

Tourism, another leading forex earner for Kenya has almost been crippled by the current state of insecurity in the country.

“This year, the shilling has been undermined by a firmer dollar, lower hard currency receipts due to a slump in tourism, as well as a growing current account deficit driven by demand for imports like capital goods,” NIC Bank treasury dealers said in a daily report yesterday.