CBK now defends move to shield shilling against market volatility
The Central Bank of Kenya has moved to defend its recent increased interventions in the money markets, citing a need for economic stability and a need to defend the shilling against volatility caused by the prevailing economic and political climate.
The CBK cited the law and the need for price stability in supporting its actions, dispelling claims that it was subverting the fundamentals of a free market economy.
“The CBK’s primary responsibility is formulating and implementing monetary policy to achieve stability in the general price level; this includes the exchange rate which is the price of the Kenya shilling expressed in other currencies,” a statement uploaded on the bank’s website read in part.
The CBK has been accused of excessively mopping money from the market as it moves to defend the shilling from weakening against the dollar.
The effect has been a steep rise in interbank lending, rising to over 10 per cent last week, up from 5.98 per cent recorded in the first week of January.
The high interbank rate has hurt small and medium banks, which survive by borrowing money from big banks.
The shilling has come under pressure due to political uncertainty, which has increased in the past few days, owing to delays in releasing presidential results of the just-concluded March 4 General Election.
On Tuesday, the shilling gained in the early hours of the morning after results indicated that there would be an outright winner but ceded ground by close of trading after this position changed.
The shilling opened trading at Sh85.55/65, rallying to Sh85.2/30 before losing to close at Sh85.60.
It has since been seesawing at levels of Sh85.50 to Sh86.80 with some forex dealers predicting that the Kenya currency could touch a low of Sh88 to the dollar should the current political stalemate persists.
The regulator noted that its participation in the foreign exchange market is aimed at stemming excessive volatility in the movement of the exchange rate, dismissing claims by some sections of the public that its interventions were aimed at defending a particular level or direction of change of the exchange rate.
“Supporting a specific level or direction of movement of the exchange rate in a liberalised foreign exchange market with an open capital account is neither sensible nor achievable,” said the CBK.
Dealers say they support the Central Bank’s decision, noting that it is within its legal mandate.
“The regulator has a legal mandate to ensure that the market fundamentals do not spin out of control, especially on adverse economic times,” said Mr Chris Mwiga from KCB’s treasury department.
Section 26 of the CBK Act obligates the Bank to “at all times use its best endeavours to maintain a reserve of external assets at an aggregate amount of not less than the value of four months imports as recorded and averaged for the last three preceding years.”
The CBK, in its latest intervention, sought last Friday to mop up Sh10 billion from the market through seven-day repurchase agreements (repos) and 14-day Term Auction Deposits (TADs).