CBK holds off intervention to prop up falling Kenya shilling (Ksh)
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CBK avoids interventions to prop up the falling Kenya shilling (Ksh) in the foreign exchange rate market
CBK (Central Bank of Kenya) avoids interventions to prop up the falling Kenya shilling (Ksh) in the foreign exchange rate market.
The Kenyan shilling will not be supported in the foreign exchange rate market, according to the Central Bank of Kenya (CBK), which has opted to let it establish its equilibrium instead.
The local currency has lost 15% of its value versus the US dollar so far this year, but the apex bank claims it has mostly scaled up intervention, indicating the decline in the local currency is not a sign of excessive volatility.
“We of course pursue a flexible exchange rate system and sometimes intervene, although we have not been intervening as much lately. We intervene when we think there is excessive volatility, otherwise, we allow the exchange rate to find its own level through demand and supply,” CBK Governor Kamau Thugge said on Monday.
At the close of trading on Friday, the CBK had the shilling quoted at Sh141.44 against the dollar, with the local currency having declined by 0.9 percent.
In addition to selling dollars from its reserves to the open market to balance the supply of hard currency in the market, the CBK uses a combination of monetary policy and open market operations as some of the intervention tools to stable the shilling.
The CBK uses term auction deposits and repurchase agreements during open market operations to adjust the amount of commercial banks’ deposits kept relative to the statutory requirement.
The instruments seek to influence the level of money supply, which is ultimately reflected in the exchange rate.
“Change in these deposits impact on the rate of interest at which credit is provided which in turn affects the growth of deposits held with commercial banks which is the dominant component of money supply,” the CBK highlights.
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Analysts have tipped the local currency to remain under pressure in the short run from a combination of factors, including sustained demand.
The CBK expects the slowdown in US monetary policy tightening to ease pressure on the unit, alongside an improved balance of payments with the current account deficit having improved to 4.8 percent of GDP as at the end of May.
The improvement of the balance of payments has come against the backdrop of rebounding exports, tourism, and resilience in remittance flow.
In addition, the CBK notes that import costs have decelerated from falling fuel prices and the windup of key government infrastructure projects, which have trimmed the importation of machinery.
The recent tightening of monetary policy, which saw the Central Bank Rate raised to 10.5 percent from 9.5 percent at the end of June, is expected to partly cushion the local unit by incentivizing foreign investments in the domestic market.
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