SME News

Central Bank tightens liquidity before polls

Kenya CurrencyInter-bank borrowing costs went up slightly last week as the regulator tightened liquidity to steady the shilling ahead of the March 4 polls.

The shilling had stabilised around 87.40 units against the dollar, having gained from a one-year low of 88 units touched two weeks ago.

After Central Bank’s aggressive mop-up of shillings in the open market that cut its supply, the rate at which banks borrow from each other went up by a percentage point to an average of 7.65 per cent last week as compared to 6.66 per cent a week earlier. The average volumes transacted daily also went up to KSh.12.8 billion from KSh.9.8 billion.

Johnson Nderi, an analyst at Suntra Investment Bank, said that CBK was stifling liquidity through open market operations to manage inflation and support the shilling. The fact that banks were short of liquidity was indicated by the inter-bank activity going up.

Last week, CBK mopped up over KSh. 3.5 billion through repurchase agreements, commonly referred to as Repos.

CBK, in its weekly bulletin that was released on Friday, said that the average Repo rate went up to 7.64 per cent during the week ended February 6, 2013 from 6.71 per cent recorded in the previous week as the Central Bank increased sales of Repo securities to banks.

Traders were of the opinion that the regulator’s actions had stabilised the currency.

Stephen Lagat, head of trading at CfC Stanbic Bank, said that it had helped until that time and in future it would depend on the customer demand and supply.

In spite of the Central Bank’s intervention in the money market its foreign currency reserves went up to $ 4.98 billion from $ 4.96 billion the week before.

Mr. Lagat said that liquidity couldn’t be tightened by buying dollars and so this could be more as a result of revaluation of the currency holding.

Central Bank of Kenya’s intervention by pumping the dollar into the market had led to the regulator’s currency reserves dropping below the statutory four-month cover raising anxiety over its muscle to support the shilling.

With the present political campaigns expected to infuse billions of shillings into circulation the regulator would face more pressure to maintain control of the shilling and inflation rate.

The finance minister had, last week, had ascribed the shilling’s depreciation to the huge demand for dollars amounting to $ 60 million in the last week of January by two oil companies and a telecom company.

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