Kenyan shilling gains on tight liquidity, focus on MPC

NAIROBI, KENYA: The Kenyan shilling firmed on Wednesday, helped by a liquidity squeeze that has led to rising overnight lending rates, but trade was cautious hours ahead of central bank's interest rates decision.

At 0756 GMT, commercial banks quoted the shilling at 100.95/101.15 to the dollar compared with Tuesday's close of 101.10/20.

Traders said due to tight liquidity in the money market, interbank lending rates had risen further and made it costly to hold dollars, which was supporting the shilling.

The weighted average interbank lending rate jumped to 20.4375 percent on Tuesday from 19.8170 percent a day earlier, and hit an intraday high of 22 percent.

"In the morning it had appreciated. It's being driven by the cost of holding any long dollar positions," a trader at one commercial bank said.

"The way (overnight lending) rates have seriously gone up, most banks are funding their shilling positions by maintaining short dollar positions."

A trader at another bank said trade was expected to be subdued while the market awaits the outcome of the central bank's Monetary Policy Committee meeting later in the day.

A Reuters poll of analysts showed they expect the bank to raise the rate to 12 percent from 11.50 percent.

The central bank said it planned to mop up 3 billion shillings in excess liquidity ($30 million) from the money markets.