EAC currencies at all time low

NAIROBI - The Kenyan Shilling entered into uncharted territory last week nearing the hundredth mark against the dollar a move which spread jitters across the country.
The new record low marked a continued free fall of the Kenyan currency against the dollar with analysts predicting even harder times ahead.
In early trading from Tuesday, the shilling was exchanging at between Ksh97 and Ksh96.55 against the dollar.
On Thursday however, the shilling weakened dramatically to touch a record low of Ksh98.05 in early trade as investors bought dollars on fears that Europe's escalating debt crisis could lead to a global banking crisis.    
According to Mr  Mohammed Abdi, an investment analyst with Stanbic Investment, this downward trend is likely to continue for the foreseeable future  as the country's foreign exchange reserves continue to dwindle.
"The shilling's poor performance against the dollar is largely to do with the low levels of our foreign exchange reserves at CBK," said Abdi in an interview.
 Foreign exchange reserves dropped for the second consecutive week to shave off $150 million (or Sh14 billion), piling more pressure on the government to act further in order to save the ailing shilling that has depreciated by nearly 20% this year.
Abdi said last week's action by Central Bank to raise the Central Bank Rate (CBR) which is the rate at which Kenyan banks borrow from the Central Bank from 6.25 per cent to seven per cent in a bid to prop up the shilling has evidently not paid off meaning the 75 basis point increase was too minimal.
 He said dealers are likely to remain cautious in their trading with the dollar in coming days and weeks  as they continue to monitor what action CBK will take as well as how the Euro debt crisis pans out.
"CBK may intervene further and as the Euro continues to strengthen against the dollar, these dynamics will have a bearing on how the shilling reacts," said Abdi.
Central Bank has been under pressure to raise the Central Bank Rate (CBR) as a short term measure of propping a weakening shilling although analysts have warned that its downside could be a rise in the base lending rate by commercial banks.
CBK at one point raised the CBR to eight % before reverting to 6.25 %, a move that paid off almost immediately by improving the Shilling's performance against the Dollar but most commercial banks responded by raising their base lending rates.
By assuming a precautionary approach in its monetary policy intervention, financial analysts had accused CBK of not doing enough to cushion Kenyans against the twin effects of a weakening shilling and spiraling inflation that rose to 16.67 in August.  But following last week's meeting of the Monetary Policy Committee (MPC), the Committee said the decision to raise the CBR was informed by the need to gradually tighten the monetary policy in order to cushion the economy from high inflation besides facilitating commercial banks' liquidity management.
The Committee meets monthly to assess developments in the economy with focus on reviewing the outcomes of various measures that had been taken to stabilize the market as well as analyze the direction and results of various policies.
During the meeting, it noted that inflation, exchange rate and money market volatility continued to pose a challenge to the economy.
The MPC noted that the economic situation in the US as well as the debt crisis in Europe would continue affecting the exchange rate, inflation and Kenya's economic recovery.
CBK Governor Prof Njuguna Ndung'u who chairs the MPC noted in a statement released after the meeting that high food and fuel prices continue to drive inflation while balance of payments pressures were also negatively impacting the exchange rate.
Analysts say the Kenyan economy has not benefitted from inflation like that of Tanzania because the country earns more from its industries and low consmption in the region directly affects it.