CBK moves to forestall inflation resurgence

By James Anyanzwa

Central Bank has stepped up efforts of mopping up excess liquidity from the money market to support the value of the shilling and ward off worries of renewed inflationary pressures.

The rate of inflation has dropped to 7.74 per cent last month (July), up from 10.05 per cent in June occasioned by a decline in food and fuel prices, the slowest growth in commodity prices in 16 months (since march 2011).

And with the money market awash with excess cash, which have seen massive oversubscriptions in Government Treasury Bill and Bond auctions, Central Bank is cleaning up the surplus through sale of government securities.

The bank sought to mop up Sh13 billion and Sh12 billion through repurchase agreements (Repos) on Wednesday and Thursday.

The banking regulator increased its repo amounts in the last two sessions in order to support the value of the shilling, which had dropped by 30 per cent last year.

The shilling factor

 “ The shilling is now oscillating in a narrow range. If it was left for the market forces it would have weakened but it will hold for quite some time because of the intervention by the Central Bank,” Solomon Alubala, Head of Trading at Cooperative Bank told The Standard yesterday.

“ We have a lot of maturing government papers (Treasury Bills and Bonds) and as a result there is high liquidity in the market. CBK has acted fast so that we don’t have threats of inflation.”

Increased liquidity in the market makes it cheaper for commercial banks to hold long dollar positions.

In the money market, the weighted average of interbank interest rate fell in the last three weeks due to an increase in liquidity brought about by debt redemptions. The rate was down to 7.9 per cent on Wednesday from a high of 14.1 per cent in late July.

On Wednesday the shilling weakened, as importers took advantage of this week’s gains in the local currency to buy dollars, while falling rates in the money market made it cheaper for banks to hold long greenback positions.

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