Economy - Has the Central Bank of Kenya (CBK) run out of instruments to hold the economy steady? This is the question that occupies the mind of most businesspeople as the week ends with the shilling ever more close to the Ksh100 mark against the US dollar and pressure mounts on interest rates after last week's increase in the benchmark Central Bank Rate (CBR).

All eyes were Thursday looking the CBK way for any signals that the volatility that has persisted in the currency market for the past three months is about to bottom out, leaving room for execution of a policy stance that can bring some certainty in the business environment.

"The level of volatility is such that it is no longer possible to plan or budget for anything, even in the short term," said Shreyesh Patel, a Nairobi-based trader of motor vehicle parts, underlining the pain that businesspeople continue to bear. "It is unbelievable that we were budgeting for our next consignment of imports at the rate of Ksh93 to the dollar and only seven days later that has shot up to Ksh99."

The CBK has particularly come under increasing scrutiny in the past few months that it has struggled to keep the shilling afloat, diffuse inflation and meet the government's borrowing needs without jerking up interest rates.

It has been seven weeks of nerve-racking experience for the business community as Njuguna Ndung'u, the Central Bank governor, who saw Kenya through the difficult post-election period and global economic crisis of 2008 with relative ease, has exhibited signs of fatigue with an unprecedented muddling through the monetary policy arena.

Signs that Prof Ndung'u was losing the grip on monetary affairs first emerged two months ago when he, together with the Monetary Policy Committee (MPC), decided to keep the benchmark CBR at 6.25 per cent against general expectation of rising inflation pressure then already above 15 per cent that required a tightening of monetary policy.

That decision left the government bond yield - the price that the Treasury paid to borrow money from the domestic market at nine per cent, nearly three percentage points above the policy rate, creating huge arbitrage opportunities in the market.

Still in denial of the changes that had taken place in the market, Prof Ndungu's answer to the predicament was a turn to ad hoc measures that saw the CBK publish the applicable rate for the overnight lending window on its website every morning.

That decision alone caused so much turmoil in the money markets, forcing Prof Ndung'u to convene a special MPC meeting that ultimately decided to raise the CBR by 75 basis points a move that was expected to stabilise the exchange rate.

Geoffrey Irungu

The Citizen/26/09/2011