Shilling gains against dollar ahead of Central Bank rate-setting committee meeting Wednesday

NAIROBI: The shilling strengthened further yesterday, helped again by tight local currency liquidity in the money markets, traders said. At the opening of business, commercial banks quoted the shilling at 100.95/101.15 to the dollar, from Monday's close of 101.35/45.

Traders said the shilling was also getting some support from market expectations that the Central Bank will raise its benchmark lending rate today when its Monetary Policy Committee meets.

According to Thomson Reuters data, liquidity tightened, with the weighted average interbank lending rate rose to 19.8170 per cent on Monday from 19.2121 per cent a day earlier, and some banks borrowed at rates as high as 21 percent.

"Liquidity is very tight. Things are bad in terms of liquidity, so people are selling dollars to buy shillings," a senior trader at one bank said. Traders said the shilling had strengthened to touch 100.80/90 in early trade before giving up some gains when there was a general increase in dollar buying from corporate clients.

"This is on the back of renewed interest from corporates at better levels, to take advantage of these levels, because the rates are fairer. Inquiries are from all counters," a trader at a second commercial bank said.

 Analysts polled by Reuters expect the bank to raise the rate to 12 per cent from 11.50 per cent. Despite last month's reprieve in inflation, the median forecast from the poll of 11 analysts, taken in the past week, suggested CBK would lift interest rates by 50 basis points to 12 per cent. However, five said there would be no change and six said rates would go higher, with some saying they may go as high as 13 percent at the August meeting.

"If you do not raise rates now, the portfolio flows that you are waiting for to come in are not going to come in because foreigners are not going to have the added comfort for the currency," Standard Bank economist, Jibran Qureishi, said.