Over the past 12-months, the Kenya shilling has depreciated 12.6% against the US Dollar to 128.3 as of 7th March 2023 from 114.0 on 7th March 2022.
This continued depreciation has mainly been driven by an ever-present current account with Kenya being a net importer and the import bill being in US Dollars, which had a bull run on the back of rate hikes.
The US Dollar Index appreciated by 5.0% to 104.2 as of 7th March 2023 from 99.3 on 7th March 2022 as the US Federal Reserve interest rate was hiked to 4.5%-4.75% in February 2023 from 0.25%-0.5% in March 2022 to manage inflation on the back of supply bottlenecks and elevated energy prices.
Interest rate hikes in the US affect the currency by increasing yields in the US, attracting investors who flock to US Fixed Income securities and divest from non-USD dominated ones, leading to the increased strength of the dollar.
Read: Equity Bank To Increase Interest Rates For Riskier Borrowers
Increased strength of the dollar increased the price of dollar imports hence demand for US Dollars by Kenyan importers significantly, further contributing to the depreciation of the Kenya shilling against the US Dollar.
In the Friday-released Monetary Policy Report, the United States Federal Reserve (the Fed) gave indications of a continued hawkish monetary policy stance. Year-over-year consumer inflation slowed down to 6.4% in January 2023 from its peak of 9.1% in June 2022, remaining well above the target of 2.0%.
This is attributable to demand levels that have remained resilient even in the face of rapid interest rate hikes attributable to a tight labour market with job gains averaging 380,000 per month since mid-2022 and a steady rise in consumer expenditure attributable to the spending of savings accumulated during the pandemic.
Jobs growth, consumer inflation, and retail sales data for February 2023 are expected mid-March, before the interest rate decision is taken on March 21 or 22. Should strong job growth, elevated inflation, and a jump in retail sales be recorded, there will be expectations of further rate hikes.
This could further lead to a strengthening of the US Dollar, causing an increase in Kenya’s US Dollar denominated import bill and debt payments, leading to a continued depreciation of the Kenya shilling against the US Dollar.
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