The Central Bank of Kenya (CBK) sent out two sharply contrasting signals in a matter of hours on Wednesday, which set the shilling on two wild swings. The banking sector regulator injected Sh15.3 billion into the system through reverse re-purchase agreements, pushing the shilling to an all-time low of 97.50 units to the dollar.
It was the second time in two days that the currency had touched an historic low. The regulator then poured an undisclosed volume of dollars into the inter-bank market in the afternoon, which helped the currency to stabilize at about 96.70 exchange rate- still weaker than the previous record low of 96.20 set on Tuesday. For the third day in a row Thursday, the shilling touched yet another unprecedented low of 98.20 to the dollar, before regaining ground to 97.70 following an announcement that the regulator would not inject any more shillings through the Repo market.
CBK’s decision to flood the inter-bank market with Sh15.3 billion on Tuesday, when it was well aware that the shilling was hanging on a thin thread, would appear to have been reckless at a first glance.
But as Treasury’s borrowing agent, the Central Bank was alive to the biting cash crunch in the inter-bank market, and the cash injection was meant to smoothen government’s borrowing through a two-year bond and six-month Treasury bill. Whatever the merits and demerits of the decision, it highlighted a government borrowing situation that is getting increasingly desperate, as the State struggles between maintaining macro-economic stability and servicing immediate financial needs.
Besides a free-falling currency, CBK is faced with a soaring inflation rate that is way above tolerable limits, and a surge in interest rates that has seen short-term Treasury bills climb to double digit levels. Most critics will agree that Central Bank has little control over many of the factors that have rendered its monetary policy impotent.
It is the mixed signals coming from CBK that have, however, cast an unfavorable light on the institution. The hasty retreat that the regulator beat after a three-week attempt to tinker with the inter-bank rate exposed the soft under-belly of a watchdog that had either hastily implemented a poorly thought out policy, or one that did not have the guts to push through its ideas to a conclusive end.
Wednesday’s decision to sell shillings in the market, which ended up upsetting the currency, only to attempt to reverse this by selling dollars to banks, again exposed a curious indecisiveness at CBK. An uncertain policy stance is the last thing that markets need in times of international economic turbulence.
