CBK steps up shilling mop-ups to rein in depreciation

The Central Bank of Kenya (CBK) has registered a step-up in the mopping of the shilling from the market in a week that saw the unit touch a new low of Ksh.107.5 against the US dollar.

As part of its open market operations (OMOs), CBK was in the repo market during the week to source for Ksh.55 billion as the reserve bank sought to rein in high liquidity in the market.

On Friday, the CBK accepted Ksh.22.6 billion out of similar bids by dealers in government securities at an average rate of 3.508 percent.

The shilling mop-up is a routine exercise by the bank in smoothen out volatility in the forex exchange rate.

Repo’s (Repurchasing agreements) allow the CBK to effect short-term borrowing to dealers in government securities as a means to regulate money in supply.

The current tenure of repo’s offered by the reserve bank in seven days.

While investment analysts and dealers could not pin point any one reason for the shilling’s recent depreciation against major world currencies, the CBK has attributed the weakening an unmatched demand for dollars.

“The Kenya shilling weakened against major international and regional currencies during the week on account of unevenly matched demand and supply of dollars in the interbank market,” the CBK said in its weekly bulletin published Friday.

The recent weakening has also been preceded by high liquidity in the financial markets supported in part by government and dividend payments.

Treasury bill (T-bill) auctions in the new financial year to date have been oversubscribed with bids for the auction on July 16 for instance totalling Ksh.65.2 billion against a target of Ksh.24 billion to register a 271.5 percent performance rate.

The interbank-rate has also tumbled in recent weeks having stood at 1.76 percent on July 16 from 2.36 percent on July 9.

The observed bulge in liquidity has brought down effective interest rates charged by investors in the Treasury instruments.

The effective rate on the 364 day T-bill for instance stood at 7.5 percent this week from a high 9.03 percent on June 11.

Interest rates on the repo-rate have also come down to an average 3.022 percent this week from 5.45 percent at the end of 2019.

CBK usable forex reserves have however remained largely as a non-moving component having stood flat at Ksh.1.041 trillion ($9.7 billion) in the past two weeks against observed weakening in the local unit.

The reserve bank on occasions sells dollars from its vault to smoothen out emerging volatilities in the units’ effective exchange rate.