Central Bank committed to flexible exchange rate

Kenya’s central bank is committed to a flexible exchange rate regime and will not deviate from that policy despite the recent weakening of the shilling, according to Governor Dr Patrick Njoroge.

Speaking to Reuters on the sidelines of the World Economic Forum in Davos, Dr Njoroge said he was not worried about the exchange rate of the Kenyan shilling.

The currency has already weakened 1.5 percent against the dollar so far this year, mainly due to seasonal demand from importers and a firmer greenback globally.

“We are fully committed to flexible exchange rate regime. We know the benefits of that and we are not deviating from that,” said Dr Njoroge, adding that the bank only intervened to smooth out excess volatility.

The weakness of the currency has prompted fears that the depreciation could feed into consumer prices. But Dr Njoroge said inflation was “well within margin” and that the pass-through from 2.5 percent currency depreciation was not material.

Data released at the end of the year showed that Kenya’s inflation rate fell to 6.35 percent year-on-year in December from 6.68 pct year-on-year in November.

Kenya’s central bank has a short-term inflation target of 5 percent, with a 2.5 percent band either side of that.

Some investors have expressed concerns about the strength of inflows from exports and tourism due to an ongoing drought and a presidential election set for August. Tourism along with tea, horticulture and remittances are Kenya’s leading sources of foreign exchange.

Official reserves stood at $6.94 billion at the end of last week, equivalent to 4.55 months’ worth of import cover.

The governor said he expected the current account deficit to be “in the order of 5.3 percent”, although the numbers were yet to be finalized and were due to be released within weeks. The deficit was at 6.8 percent in 2015.

The central bank’s Monetary Policy Committee will hold its next meeting on Jan 30. The bank held its benchmark lending rate at 10 percent at its last meeting, in November.

Dr Njoroge said that a rule imposed by the government last September capping commercial bank lending rates – a move he opposed – was a “temporary aberration” and that it was too early to gauge its effect.

The cap, set at 400 basis points above the central bank rate, was intended to spur personal and corporate investment by holding down interest rates. The rule, which was imposed in September, sent bank shares tumbling.