Bloomberg News

Kenya Lowers Banks’ Foreign Currency Limits to Help Shilling

October 13, 2011

(Updates with Kenyatta’s comment in third paragraph.)

Oct. 13 (Bloomberg) -- Kenya’s government imposed tighter limits on foreign currency operations at the country’s banks, as part of a set of measures to bolster the shilling.

The foreign exchange exposure limit for commercial banks was lowered to 10 percent of core capital from 20 percent, Finance Minister Uhuru Kenyatta told reporters in Nairobi today. He spoke after meeting Richard Etemesi, chairman of the Kenya Bankers Association, and central bank Governor Njuguna Ndung’u to discuss the plan.

The government will also convene regular meetings between central bank and commercial bank officials, and is examining ways to cut unnecessary spending, Kenyatta said. Ndung’u said that the central bank will “intensify” auctions of repurchase and reverse repurchase agreements, or repos, to manage liquidity.

The shilling has dropped 21 percent against the dollar this year, helping push inflation to 17.3 percent, more than triple the government’s target. The central bank raised its key lending rate by a record 4 percentage points last week to halt the currency’s slide.

The shilling gained for a second day today, adding 1.5 percent to 102.4 per dollar at 4:20 p.m. in Nairobi.

Kenyatta said the government supports the central bank’s rate decision and its declared readiness to carry out further policy tightening. He said the shilling’s decline is “not driven by changes in economic fundamentals.”

Investors lost confidence in the central bank after it sent conflicting signals on monetary policy this year, the Kenyan Parliamentary Budget Office, a non-partisan group whose research informs lawmakers, said on Oct. 4. The bank cut rates in January then reversed the decision two months later.

--Editors: Ben Holland, Karl Maier.

To contact the reporter on this story: Sarah McGregor in Nairobi at smcgregor5@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net


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