MONEY MATTERS

Shilling to hit 116.7 against US dollar in 2022 on hiked Fed rate

It has been hitting new record lows on a daily basis since early November, largely weighed on by a stronger greenback.

In Summary
  • It is expected to close at Sh126.5 per US dollar by 2026.
  • Yesterday, the local currency closed at 113.30 against the greenback compared to 113.17 on Friday last week. 
A cashier at a local Forex count dollars and shillings
A cashier at a local Forex count dollars and shillings
Image: Fredrick Omondi

The Kenyan shilling could depreciate further as the US prepares to hike interest rates. 

Yesterday, the local currency closed at 113.30 against the greenback compared to 113.17 on Friday last week. 

Yesterday, the International Monetary Fund (IMF) said that faster than expected Federal Reserve moves could rattle financial markets and trigger capital outflows and currency depreciation. 

In a blog post, the international lender said it expected robust U.S. growth to continue, with inflation likely to moderate later in the year.

''Broad-based U.S. wage inflation or sustained supply bottlenecks could boost prices more than anticipated and fuel expectations for more rapid inflation, triggering faster rate hikes by the U.S. central bank,'' IMF said.

It, however, added that a  gradual, well-telegraphed tightening of U.S. monetary policy would likely have little impact on emerging markets, with foreign demand offsetting the impact of rising financing costs,'' IMF said.

"Emerging economies should prepare for potential bouts of economic turbulence," the IMF said, citing the risks posed by faster-than-expected Fed rate hikes and the resurgent pandemic.

St. Louis Fed President James Bullard this week said the Fed could raise interest rates as soon as March, months earlier than previously expected.

Faster Fed rate increases are expected to rattle financial markets and tighten financial conditions globally.

''These developments could come with a slowing of U.S. demand and trade and may lead to capital outflows and currency depreciation in emerging markets," IMF said. 

It said emerging markets with high public and private debt, foreign exchange exposures, and lower current-account balances had already seen larger movements of their currencies relative to the U.S. dollar.

The shilling has been hitting new record lows on a daily basis since early November, largely weighed on by a stronger greenback.

According to the latest analysis of the Kenyan shilling by ForecasEconomics, accelerating inflation in the U.S. over the past few months and the Fed’s increasingly hawkish tone have raised expectations of a sooner-than-anticipated rate hike.

''The depreciating trend will continue in 2022, amplified by election-related uncertainty, which typically saps confidence, taking the shilling to Sh116.7 per by year-end,'' ForecasEconomics says. 

It expects the pace of decline to moderate over the remainder of the forecast period, helped in part by monetary tightening, leading to an average exchange rate of Sh126.5 per US dollar by 2026.

''The rate of nominal shilling depreciation will, nonetheless, be outpaced by inflation,'' the report says. 

The drop in the value of the local currency is a blessing in disguise for local exporters who are likely to earn more but a curse to millions of people who depend on imported items. 

''Depreciation of the shilling will see importers pass the bill to consumers, pushing up the cost of living. This is going to worsen as the country heads to the general election in August,'' an independent economist Fred Oloo told the Star on phone.