The shilling’s exchange rate to the dollar is projected to remain relatively stable for the remainder of the year.
The stability is expected to shield consumers from additional price increments at a time when inflation has climbed above the preferred CBK ceiling.
Analysts at Sanlam and Stanbic Bank say that the shilling is being aided by lower demand for the dollar by capital goods importers due to a slowdown in industrial production, a healthy foreign exchange reserve position, increased remittance flows and a weaker dollar globally.
A steady shilling partly helps stabilise prices as most industries depend on imported raw materials and machinery whose costs rise when the dollar appreciates, with the resultant cost passed onto consumers.
“The shilling is likely to remain relatively stable in an acceptable trading range largely aided by relatively soft domestic demand and reduced import activity, and a weaker global dollar,” Stanbic Bank regional economist for East Africa Jibran Qureishi said in an interview.
The shilling exchanged 0.26 per cent stronger day-on-day against the dollar in early trade Monday at 102.89 units – its highest level since March 27 when it traded at 102.91 units.
This was a continuation of last week’s progressive gains against the greenback, which was also weakening against major global currencies.
The dollar is largely battered by concerns over the impact of Hurricane Irma and threats by North Korea to launch nuclear missiles on US economic growth.
The Central Bank of Kenya (CBK) in its weekly bulletin said the stability of the shilling “partly reflected weakening of the US dollar following rising geopolitical tensions and a return to market normalcy, on the local scene, following the Supreme Court ruling on September 1”.
The Kenyan currency has depreciated by 0.39 per cent this year, making it one of the most stable on the continent against the dollar. It has also been aided by swift CBK intervention whenever it shows volatility.
“One of the things that the central bank doesn’t allow over and above the things in the Consumer Price Index basket … is additional inflation on the basis of the currency being weaker relative to previous position,” said Sanlam Investments Kenya chief executive Kennedy Muriithi.
The forex reserves held by CBK remained stable last week at $7.48 billion, or 4.97 months of import cover.