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Kenya has no preferred position on shilling; let market forces rule

Saturday October 10 2015
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Central Bank of Kenya (CBK) Governor Patrick Njoroge. PHOTO | FILE

You have said that there are efforts to promote market discipline with regards to speculation. How is the Central Bank going to ensure that discipline?

We have two markets: The money market and the forex market. At the forex market, it’s the supply and demand forces that determine the position of the currency. Occasionally, the exchange rates will move not because of supply and demand but because of information not evenly shared, what is called market intelligence. This destabilises the market. This is what we are trying to eliminate so that players adhere to the rules. The players have responded appropriately with greater oversight on forex dealers and institutions that work within these markets.

On the money market, we have tightened access to the discount window, which will now be accessed by banks as a lender of last resort. The Central Bank of Kenya has put in place measures that will now force players to only borrow from it when no other market player is able to help them.

Previously the banks preferred the CBK as opposed to interbank arrangements. We have done this to ensure that they manage their finances within the market and improve on managing their own liquidity. In that sense, we hope to see some market discipline.

While being vetted by parliament, you mentioned that the country’s inflation was too high and we needed to bring it down. How much lower can it go?

Our inflation target is 5 per cent, plus or minus 2.5 per cent. If we move out of this range, we need to be worried. We are keen on change, the outcome rather than the target. There is scope for the inflation to fall below 5 per cent and you can see our trading partners’ inflation outcomes. We understand our inflation dynamics are different, but we will try to push it down

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The Monetary Policy Committee has increased lending rates by 300 basis points this year. Do you think this is sufficient to contain inflation and currency depreciation?

The assessment of the MPC was that the measures taken, including the hiking of the interest rates in June and July, remained appropriate relative to the target of reducing inflation. If the inflation moved in the opposite direction, then we would decide what is appropriate.

The MPC still doesn’t believe that expectations have fallen, even though inflation fell by 5.8 per cent. We left the rates where they were because we felt that inflation expectations needed to fall.

You have strongly advocated the need for fiscal prudence by government agencies to boost stability. Have you seen any improvement in terms of changes in the fiscal and current account deficit?

It is essential to have close coordination between monetary and fiscal policy. The way things are, if we have a loose fiscal policy and a tight monetary policy, then we are not going anywhere. There has to be some strengthening of the fiscal position. We have continued to work with the National Treasury to strengthen their fiscal position. I know they are working towards executing their budgets and contain this.

We have seen the rates of government bonds hit the roof. Is it of concern to you when the government borrows one-year bonds at rates of as high as 20 per cent?

We are the agent of the National Treasury. We all know that the interest rates went up on most of the government instruments. It is an auction, it’s the market driving the rates up. When you bid, the outcome is clear. Clearly, investors demand higher returns for their lending. We have seen a rise in short-term rates and it is inevitable that the interest on the 91 and 182-day Treasury bill has been rising.

It is also important that not all of these T-bills interests moves smoothly. It just shows you how thin the market is. This is consistent with our tight monetary stance to anchor our inflation, which will reduce volatility in the forex markets.

Some people say you dodged the bullet when the US Fed didn’t raise its rates. Are you prepared for when they do eventually move?

Yes. Kenya, like other emerging markets, didn’t just dodge a bullet but a nuclear explosion. It’s inevitable that the US Fed will raise the rates. At the beginning, the bets were that the rates would rise in September, but the China economy meltdown did influence the Fed’s position. We hope that they will be more sensitive in their rate decision to dynamics outside their financial markets.

We understand that most of the dynamics in the forex market have been pegged to expectation of actions in the US. Our concern is that there shouldn’t be instability and we are ready for it. We went through our own tests in June and July and we learnt how to use the policies. We believe that we are ready to face their position either next month or in December.

How concerned are you about the state of the foreign-exchange reserves in the country?

From our own analysis, the measures by the MPC are producing the desired effect of reducing market indiscipline in the financial sector, a major cause of market instability. As at September 18, we had $6.18 billion, equivalent to 3.94 months import cover. We believe that this is sufficient for short-term shocks in the markets. We still have the $600 million from the International Monetary Fund to cushion the shilling just in case we need to act on stemming volatility.

What is the progress with the acquisition of new currency?

We need to have a new currency in tandem with Article 231(4) of the Constitution. We have been advised that the procurement of this currency is ongoing in accordance with Central Bank Act and the Procurement and Asset Disposal Act.

We will move as fast as we can — and carefully — to deliver this currency. We plan to have the new currencies in notes of 50, 100, 200, 500 and 1,000 shillings. The current currency will be withdrawn in phases.

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