NAIROBI, Kenya, Aug 10 – The shilling rallied marginally against the US dollar to close the day at Sh93.50/94 after reaching an all-time low in Tuesday’s trade.
Forex traders attributed the strengthening of the shilling to an announcement by the Central Bank of Kenya that it would offer reverse repo agreements.
Duncan Kinuthia of Commercial Bank of Africa’s Treasury Department said the move was in line with the CBK’s Monetary tightening stance as it seeks to allow the market to correct itself.
“The CBK has given an indication that it will continue to have a tight monetary policy, as well as profit taking by banks at higher levels,” Mr Kinuthia said.
In a statement to banks, the CBK said it would stay out of the reverse repo market in a bid to give commercial banks enough time to realign their liquidity requirements.
The shilling has been on a free fall against the dollar and finally hit the Sh95 mark against the greenback on Tuesday weighed down by dollar demand from importers as well as the central bank’s injection of shillings.
Mr Kinuthia said the announcement by CBK provides much need clarity of what actions were being taken by the bank to bring down exchange rate volatility.
Stanbic Investments Senior Investment Manager Kenneth Kaniu said the lack of direction from the CBK had been a major factor for the free falling shilling.
“The direction of the Kenya shilling is still uncertain, but it will relatively remain weak mainly driven by fiscal and monetary policy,” Mr Kinuthia said.
Mr Kinuthia said all the positive indicators of the shilling such as Diaspora remittance, horticulture exports and grants were all working well. They were however being offset by a huge import bill that was negating gains from dollar generating sectors.
“Oil accounts for 25 percent of all the imports coming into the country. The more we import the more we have to look for shillings to buy dollars and this is what might be causing the volatility,” he said.
He however pointed out that the CBK should look into hiking interest rates in the short term, to help the shilling strengthen.
CBK Governor Prof Njuguna Ndung’u however said hiking rates would be counter-productive, as it would limit credit to the private sector required for development projects that will spur economic growth.
“We are only being disturbed by our own supply side problems, so we must wait for that to stabilise first,” Prof Njuguna Ndung’u said on Wednesday.