Shilling continues its downward spiral despite Central Bank 'hawkish rate hike'

NAIROBI: The shilling fell shortly after the Central Bank (CBK) injected dollars into the market Tuesday for the second consecutive trading session. The shilling firmed to 101.50/70 per dollar in the first hour of trading, up from Monday's close of 101.90/102.00.

But soon after it was trading at 102.20/40. Traders said the bank intervened soon after the market opened. "It's an extension of Tuesday's programme," said one trader, referring to the bank's intervention late on Monday when the bank also sold dollars to support the sagging shilling that had weakened to 103.85/95, a new 3-1/2 year low. A second trader confirmed the bank had intervened.

Down about 13 per cent against the dollar this year, the shilling has been under pressure from a wide current account deficit and a slump in tourism caused by a spate of attacks by Somali Islamists. Like other frontier and emerging-market currencies, the shilling has also been weakened by the dollar's gains on the back of expectations the US Federal Reserve will start raising interest rates this year.

CBK has hiked rates by 300 basis points in the last two months but the shilling has continued its downward spiral, worrying officials who fear that could lead to higher inflation. "Monetary policy alone will not help this. There must be some determination on the fiscal side to help the shilling," said the first trader, referring to the country's wide current account deficit.

The bank also said it planned to mop up Sh20 billion in excess liquidity. Last week, the Central Bank raised its policy rate by 1.5 percentage points to 11.50 per cent.

Standard Investment Bank (SIB) analysts said the 'hawkish rate hike' would only offer "temporal relief to the currency given persistent weakness in current account position and muted foreign capital inflows given current aversion of risk globally."