NAIROBI, Kenya, Oct 10 – The Central Bank of Kenya’s move to tighten its policy by raising the base lending rate to 11 percent will only begin to be felt once there are positive sentiments in the market, bankers said on Monday.
Kenya Bankers Association Executive Director Habil Olaka argued that the market, particularly the exchange rate regime, will only surge if people felt confident enough to sell the dollars in their possession and if importers avoid panic buying.
However, he conceded that it was difficult to say with certainty when this will happen.
“It is difficult to estimate, until the sentiments in the markets cool down and people start feeling free and start selling. Once this happens, it can take a day, it can take two days or two weeks but if there is a reinforcing message from all stakeholders, it creates calm in the market and the rate starts coming down to where it should be,” he explained.
The market largely expected Wednesday’s move to raise by four percent the Central Bank Rate to be reflected immediately on the exchange rate.
Five days later however, the opposite has happened with the shilling continuing on its downward spiral closing Monday’s trade at 103.60 against the US dollar.
Having already touched historic lows of 104.15 to the greenback, Olaka warned that the ceiling has not been breached yet with the low sentiments coupled with the shortage of dollars having the potential to drive the market further down.
The Central Bank has defended the slow response of the unit saying it needs to be supported by other supply sides actions for it to have the desired effect.
However, despite the 400 basis points hike, which has been welcomed by the market as a ‘painful’ but ‘necessary’ move, there still seems to be an aspect of indecisiveness in the government’s actions, which has been partly blamed for the unit’s deterioration.
For instance, last Friday, the government reversed a decision to sell foreign exchange directly to importers opting instead to leave the market to the demand and supply forces.
This was on the advice of a technical team on how to shore up the shilling which argued that having the Central Bank bypass banks in a bid to reduce speculation would only serve to create two markets which would pose another problem in the future.
Olaka concurred adding that in the period that CBK tried to implement this directive, there was a lot of confusion in the market, which did not help to relieve the pressure off the shilling in any way.
And while many people partly blame banks for the plummeting of the local unit, Olaka maintains that the industry is keen to see a stable currency and is involved in finding a lasting solution to the problem.
To prove the banks are not ‘the bad guys’, he disclosed that many of the institutions will be forced to absorb some of the cost of increased interest rates as opposed to passing it on to the consumers.
He however reckoned that when the cost of borrowing goes up as it is bound to, credit expansion within the industry will be reduced with the end result being a slowed economic growth.
Olaka is however confident that should measures by the Central Bank to stem inflationary pressures work then the economy can expect to recoup some growth.
The director spoke to reporters after overseeing the signing of a Collective Bargaining Agreement between KBA and the Banking Insurance Finance Union that will see some 9,800 unionised workers receive a nine percent salary hike for the next one year.
KBA has vowed to ensure that all its 43 members comply with the agreement and implement it to the letter.