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Monday, May 25, 2020

Shilling continues to fall despite CBK raising rates

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The shilling Thursday morning touched 100.70/100.80 to the dollar raising the prospects of both a weak currency and high interest rates.

The currency had traded at the same level just before interest were raised on Tuesday.

Thursday, the shilling opened trading at 100.40/100.50, slightly weaker than the 100.35/100.45 point at which it closed trading on Wednesday.

“The worst case is we shall end up with two undesirable scenarios; high interest rates and a weaker currency,” said a trader at a commercial bank, warning that further weakness was likely.

The situation analysts say reflects the fact that the country’s economic structure has not changed since the 2011 currency crisis.

Monetary policy is bearing too much of the burden, the government must build local production capacity, promote investments to secure sustainable growth.

However the shilling is doing well compared to regional currencies given that it has weakened by 10 per cent this year compared to Uganda, whose shilling has lost 26 per cent of its dollar value.

The currency loss will however be a gain to net exporters such as tea and coffee despite relative cost increases in fertiliser imports and other costs.

“The tightening of the Central Bank rate appears not to have achieved the desired result,” the trader said.

On Tuesday, the CBK raised the Central Bank rate by 1.5 percentage point to 11.5 per cent, a month after the rate had been raised by a similar margin to help prop up the shilling from extended weakening against the dollar.

The shilling has come under pressure from a strengthening dollar in the global market, widening current account deficit, declining earnings from key sectors such as tourism, tea and coffee.

Renewed pressure on the shilling in the wake of the Greek referendum prompted an unexpected rate tightening by the CBK.

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