Bloomberg News

Kenya Shilling Gains Most in 2 Weeks as Bank Restricts Lending

July 13, 2011

July 13 (Bloomberg) -- Kenya’s shilling surged the most in two weeks after the central bank announced measures to restrict loans to commercial lenders and to help rein in speculative currency trading.

The currency of East Africa’s biggest economy appreciated as much as 0.9 percent to 89.53 per dollar and was trading 0.5 percent stronger at 89.85 by 12:13 p.m. in the capital, Nairobi from yesterday’s close of 90.30.

Banks planning to lend to other operators in the interbank market can’t access funds through discount window on the same day, the central bank said yesterday. Weekly borrowing is now capped to a a maximum of banks’ statutory cash reserves, or the money kept at the central bank, it said.

“The measures signify a further tightening of policy and we expect further gains in the near term, reversing the earlier sell-off as the full extent of the tightening becomes clear to the market participants,” Razia Khan, regional head of research for Africa at Standard Chartered Bank Plc, wrote in an e-mailed note to clients.

The central bank also reversed an increase in the rate it charges lenders for overnight loans back to 6.25 percent yesterday after raising it just two weeks ago, saying banks were using this as a base for interbank lending, resulting in “distortions in the money market.”

The central bank said it was concerned that lenders “have not been using the discount window as a last resort, but as a permanent supply of liquidity.”

The bank had raised the overnight rate to 8 percent from 6.25 percent on June 29 to rein in inflationary expectations and curb speculative trading in the shilling, which reached the weakest level in 17 years on June 22.

Inflation accelerated to the strongest in more than two years as East Africa’s biggest economy faced higher food and fuel costs.

--Editors: Ana Monteiro, John Kohut

To contact the reporter on this story: Johnstone Ole Turana in Nairobi at jturana@bloomberg.net

To contact the editor responsible for this story: Antony Sguazzin at asguazzin@bloomberg.net


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