Kenya shilling firms vs dollar on tight liquidity

The Kenya shilling rose on Tuesday as banks sold dollars in early trade and importers kept away on expectation the shilling could firm further.

The shilling was posted at 93.30/50 against the dollar, barely changed from Monday's close of 93.60/80.

"There was a bit of selling, mostly interbank activity," said Duncan Kinuthia, head of trading at Commercial Bank of Africa.

Traders said they expected the shilling to firm further helped by tight liquidity in the market after the central bank raised its key lending rate sharply to 16.5 percent.

The bank is set to hold its next Monetary Policy Committee meeting on December 2, which market players expect could come up with more measures to support the local currency and combat inflation.

"We will be watching for any further support action from the central bank," said Kinuthia.

Tight shilling liquidity has seen the interbank rate rise to 30.8172 percent on Monday -- the highest it has been this year-- from 30.6687 percent on Friday.

Analysts however expect the shilling to come under pressure in the short term as central bank's foreign currency reserves deteriorate, to $3.7 billion last week from a high of $4.1 billion touched in August 2010.

A growing balance of payment deficit necessitated the government to seek an additional $250 million support from the International Monetary Fund in October.

"Kenya's precarious FX position explains its appeal to the IMF for balance of payments support," said Yvonne Mhango, Sub-Sahara Africa economist at Renaissance Capital.

"The higher risk of depreciation of the shilling... suggests to us that interest rates may remain higher for longer in Kenya."

(Reuters)