Nairobi: The shilling firmed against the dollar ahead of Tuesday’s monetary policy committee meeting after the Central Bank intervened in the market by selling dollars to commercial banks. Dollar sales by the CBK lifted the shilling to 85.80/86.00 units to the dollar from Thursday’s close of 86.00/20, but analysts said the currency was still under pressure from the wide trade deficit.
“They are only moving to reduce the speed at which the currency is falling but the gap created by low exports is still there,” said a currency trader who declined to be named as he is not authorised to speak to the press.
The monetary policy committee (MPC) will be faced with a difficult policy decision as the volatile shilling has presented a new hurdle to lowering interest rates, which is necessary to jump start economic growth.
Falling treasury bill rates and a drop in the rate of inflation had strengthened the case for a lower policy lending rate, before volatility of the shilling set in two weeks ago.
Traders at Co-operative bank said that the CBK’s repeated intervention was to send a message to the market the regulator was out for a stable shilling. “They are trying to contain the currency in a range,” said Solomon Alubala, senior dealer at the Bank.
The current account deficit revealed in the latest quarterly report by the office of the Controller of Budget, shows a 54.4 per cent deterioration in the balance of trade for the first quarter of 2012 from the same period last year - meaning that local demand for dollars is on the rise while inflow of foreign currency has stagnated.
The shilling lost a quarter of its value touching 107 units to the dollar in October, while inflation rose to a peak of 19.72 per cent in November. The inflation rate has slowed down in the past six months to 12.22 per cent last month.
Central Bank has stepped up its presence in the currency market, absorbing excess shillings and offloading unspecified amounts of dollars to commercial banks.
The bank’s foreign exchange reserves fell to Sh354 billion ($4.425 billion) this week from Sh363.9 ($4.549 billion) last week. Treasury bills have fallen to single digits from 20 per cent in January 2012.
The CBK has however held policy lending rates at 18 per cent since December, on fears that a rate cut could trigger high exchange rate volatility. The shilling last year plummeted 33 per cent to 107 units against the dollar, fuelling inflation.
The current account deficit revealed in the latest quarterly report shows 54.4 per cent deterioration in the balance of trade for the first quarter of 2012, from the same period last year.