Kenya’s Shilling Slips

Kenya’s shilling depreciated the most in almost three weeks against the dollar after the central bank moved to reduce the rate at which lenders borrow funds.The currency of East Africa’s biggest economy lost 1.6 percent to 94.33 per dollar by 11:16 a.m. in Nairobi, the capital, the biggest decline since Aug. 9, when the shilling reached 95.1. That was the weakest intraday level since March 1994, when the nation abolished exchange controls.

From today, the central bank will include a factor ranging from zero to one based on “the specific liquidity conditions in the interbank market” when calculating its overnight discount rate, it said in an Aug. 26 statement on its website. The bank will also use a moving average of interbank lending rates over a longer, unspecified period to work out its overnight borrowing rate, instead of applying the previous day’s rate. The bank stopped publishing the rate on Aug. 19.“Having previously resolved not to publish the discount rate, the new circular has introduced yet even greater uncertainty in the market,” Phumelele Mbiyo, an analyst with Standard Bank Group Ltd., wrote in an e-mailed note to clients today. The bank’s Aug. 12 resolution resulted in lenders not being “assured that they would be eligible for funds. The new circular also ensures that on any day banks will not know what the current discount window rate is, thereby rendering the current level of the discount rate irrelevant as a potential anchor for setting interbank rates.”

Rate ‘Penalty’

The bank on Aug. 12 said it would increase the charges for banks using its overnight window to tighten money supply and shore up depreciation in the shilling, which reached a 17-year low on Aug. 9 as the cost of importing food and fuel pushed inflation to 15.5 percent in July, more than triple the bank’s target.Average interbank rates leapt to 26.4 percent by Aug. 25, compared with 8.34 percent before the new rules were introduced. The bank started applying a three percentage-point “penalty” on the benchmark rate or the interbank rate, whichever was higher, on borrowing from its overnight window starting Aug. 15.

The Aug. 26 rules represent a “relaxation of the monetary stance,” Mbiyo wrote. “With the shilling failing to receive much support even as the increase in interbank rates became disorderly, perhaps due to the policy stance being viewed as not credible by the market, the shilling is likely to depreciate if interbank rates decline.”The central bank loosened the requirement regarding the value of deposits lenders keep in reserves. Banks will need to maintain the cash-reserve requirement of 4.75 percent over a monthly rather than daily basis, as long as daily holdings don’t dip below 3 percent, it said.


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