The shilling has this week touched an eight-month low of 103 units to the dollar on the back of high dollar demand partly driven by the high liquidity.
The drop now raises the spectre of a rise in cost of living, given that Kenya is a net importer of goods.
The biggest knock-on effect is from the rise in fuel prices whenever the shilling weakens, which in turn filters through to the cost of other goods due to the transport factor.
The shilling had closed Tuesday’s trading session at an average of 103.00 but regained some ground in Wednesday’s trading at the 102.60 level as Central Bank of Kenya (CBK) liquidity withdrawal efforts started to take effect.
The liquidity is underlined by the fall in interbank rate to a three-month low of 1.86 percent according to CBK data.
“The narrative that has reigned in the local foreign exchange market for the last three sessions is of frivolous foreign currency inflows unable to match the increasing dollar demand,” said Commercial Bank of Africa in a treasury note.
“Analysts will be closely monitoring developments around the fifteen-year bond issued by the CBK, and whether it will aid in curbing the rising liquidity levels which seem to propel dollar demand.”
CBK was in the market Wednesday to mop up Sh12 billion worth of liquidity through its open-market operations.
The CBK mainly relies on the repo instrument when mopping up liquidity, but due to their short-term nature the funds quickly find their way back into the market compelling the CBK to go back frequently to maintain the level of liquidity it considers optimal.