Thugge: Rate hike to shore up shilling, end dollar hoarding

CBK Governor Kamau Thugge. [Elvis Ogina, Standard]

The Central Bank of Kenya (CBK) says Tuesday’s unexpected increase in the key lending rate will help prevent dollar hoarding as the shilling edges towards the 155 mark against the greenback.

The banking regulator raised its benchmark lending rate by a significant 200 basis points to 12.50 per cent from the previous 10.50 per cent.

The rate - the highest in a decade and near levels last witnessed in 2012 during the Kibaki era - is in a bid to stabilise the flagging shilling and rein in the runaway cost of living.

CBK Governor Kamau Thugge said Wednesday the aggressive monetary policy stance puts on notice individuals stockpiling dollars in the hope they will cash in from the shilling fall at a later date.

“The actions that we have taken to raise the CBR (Central Bank Rate) by 200 basis points, that should reduce pressure on the exchange rate,” Dr Thugge said during a post-Monetary Policy Committee meeting press conference with journalists in Nairobi.

The banking regulator reckons the surprise move aimed at stabilising the exchange rate will dissuade those hoarding dollars in turn bringing more greenbacks into the banking system.

“I know there are a lot of people who have been holding dollars in the banks or even dollars as an investment asset expecting the shilling to go up. We are determined to make sure we are going to tighten the monetary policy until the exchange rate is stabilised and finds its true level which in my view the current rate has overshot that true value,” he said.

“We do believe that once those holding dollars know that we are serious and determined to stabilise the exchange rate, we should see a flow of foreign exchange back into the interbank foreign exchange market.”

Investors are known to hoard dollars for speculation purposes in the wake of forecasts showing that the shilling would remain weak against the US currency. With the expected decline, those holding dollars later convert their money to shillings at a gain or do not suffer conversion losses when importing.

By the end of August this year, foreign deposits in local banks stood at the equivalent of Sh1.32 trillion, nearly 50 per cent higher than the Sh896.2 recorded earlier in August last year, according to CBK data.

Despite CBK’s strict penalties on forex market manipulation and a government-supported fuel import agreement, the local currency has continued to decline since the start of the year.

Dr Thugge said earlier that CBK intends to going forward, “address any speculative activity on forex in the banking sector.”

According to CBK data, the shilling reached a historic low on Wednesday, exchanging at an average exchange rate of 153.2882 against the dollar. As part of its clampdown on illegal dollar trading, the regulator recently cautioned that unlicensed currency dealers are offering money or value transfer services in violation of its regulations. Such services do not enjoy the protection of the law and consumers stand to lose in case of any default by the providers of these services, said the regulator.

The warning came weeks after CBK imposed a cap on the amount of foreign exchange that forex bureaus can sell to customers, limiting it to a maximum of $100,000 (Sh15.3 million) per customer per day.