The shilling has depreciated to a six-month low of 104 units against the dollar, raising concern the fall might spill over to inflation which is already above the desired range.
News agency Reuters said dealers had attributed the weakening to heightened dollar demand from oil marketers, food importers and firms looking to pay dividend to foreign investors on their books.
The shilling exchanged at an average of 104.10 to the dollar on Tuesday morning, with the #ticker:CBK indicative rate standing at 103.91 units, the lowest it has traded since mid-January.
Analysts say the currency has also come under pressure due to a weaker economy and political uncertainty as the country heads to the General Election.
“The concern for the CBK is the potential pass-through effects of further shilling depreciation on inflation, which has been trending above the upper limit of the statutory target band of 2.5-7.5 per cent for the last five months,” said the Commercial Bank of Africa in a weekly fixed income note.
“This comes at a time when the effective conduct of monetary policy is considerably undermined by interest rate caps that are evidently having negative effects on the transmission channels for the policy signal.”
Inflation in June fell to 9.2 per cent from 11.7 per cent in May, but still remains above the target range.
Attention now turns to the CBK’s monetary policy committee (MPC), which meets next Monday for its final sitting before the polls.
Analysts though anticipate that a policy rate hike may not be on the cards due to uncertainty of the effect on the wider economy now that the rate is also the pricing tool for bank loans.
The analysts said that CBK has largely intervened through withdrawal of liquidity from the money market to prevent shilling volatility in the past month.
The regulator is also holding a healthy foreign exchange reserve, which currently stands at $7.92 billion (Sh824 billion) equivalent to 5.23 months of import cover — although it is at the lowest level since the end of March.
Although it is unclear whether CBK has sold some dollars into the market in currency support, the reserves have fallen by $276 million in the last one month.