Cost of living to go up as shilling slides to 100 against dollar

The shilling on Monday crossed the 100-mark against the dollar, the first time it has done so since October 2011.

This means petroleum prices  are likely to go up when the prices are reviewed on Tuesday next week.

This will further pile pressure on the cost of goods and services, including transport. If the cost of transporting tomatoes, cabbage, maize, milk and other consumables goes up, this could lead to an increase in food prices.

Traders yesterday quoted the shilling at 100.10/100.20 at the end of closing compared with 99.70/99.80 at the close of trading on Friday.

Analysts attributed the weakening of the shilling to the strengthening of the dollar, Kenya’s widening current account deficit and the Greek referendum.

“This has led to increased demand (for the dollar),” said a bank analyst.

As a result, the cost of living is likely to go up, because the country will spend more to import petroleum products.

“Since fuel prices are going up and there are no signs of a slowdown, the cost of living is expected to rise,” said Dr Joy Kiiru, an economics lecturer at the University of Nairobi. “We cannot afford to let the shilling go beyond the 100-mark to the dollar as this will make life harder for Kenyans.”

The Central Bank of Kenya’s Monetary Policy Committee meets today and is expected to come up with a response to the deteriorating situation.

Today’s meeting will be chaired by new CBK Governor Patrick Njoroge. When it last met, it increased the Central Bank rate to 8.5 per cent, with the justification being that high rates would attract foreign exchange flows into the country, thus reducing pressure on the shilling.

The interest rates have however not gone high enough to start making a difference. Today, chances are that the Monetary Policy Committee will  jerk up interest rates by a much bigger margin. It was expected that the shilling would receive support from falling crude oil prices, but a recovery of petroleum prices has dashed the hope.

In June 2014, a barrel of crude oil was selling for about $115 (Sh11,500) but had dropped to below $50 (Sh5,000) per barrel early this year. The prices have since recovered to about $65 (Sh6,500).

“The cost of living will be impacted by the weak shilling as the cost of importing crude oil increases,” said Cytonn Investments CEO Edwin Dande.

Analysts have projected an increase in the policy rate from the current 10 per cent, to stop the currency from further weakening.

“We expect the Central Bank rate to be raised again, if it should become necessary to safeguard the exchange rate,” said Ms Razia Khan, the chief African economist at Standard Chartered Bank.

A significantly weaker shilling could also result in a greater threat to external-debt sustainability and complicate Kenya’s efforts to increase foreign borrowing.

Early this year, the International Monetary Fund approved a $688.3 million (Sh68.83 billion) credit facility that Kenya could turn to in the event of an external shock to the economy.

But analysts expect that Kenya may opt to raise the CBR rather than tapping the funds from the IMF to support the shilling.

On June 9, the CBK raised the CBR by 1.5 percentage points to 10 per cent, to tame more weakening of the shilling, which was a few points shy of the 100-mark.