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Experts anticipate that the Kenyan shilling will reach Sh138 against the US dollar by June, according to financial analysts.
These projections come from Stears, a pan-African market insights firm, which observed significant fluctuations in the shilling during May, with a notable 2.09% appreciation between May 2 and 16. Despite this, the local currency ended the month depreciating to Sh133.37 against the dollar.
Stears suggests that while the shilling’s overall stability in May resembled that of April, its movements throughout the month may raise concerns for the central bank during its upcoming June meeting.
They forecast that by the end of the second quarter of 2024, the currency will trade at Sh137.95 against the dollar, marking an increase of 8.73 percentage points from the Q1’2024 average of Sh149.99 against the dollar. This projection indicates moderate currency risks for Kenya, especially with the final interest payments on the $2 billion Eurobond issuance due in June.
Similar to the South African rand, Egyptian pound, and Ghanaian cedi, the shilling’s performance is heavily influenced by US dollar movements, global interest rates, and escalating geopolitical tensions, exposing the Kenyan economy to external shocks.
Additionally, the slight decrease in foreign exchange reserves between April and May suggests interventions in the forex market by the Central Bank of Kenya (CBK), a trend expected to persist if sharp currency volatility occurs.
Regarding inflation and interest rate decisions, the shilling’s movements imply a likely increase in energy prices (petrol, diesel, kerosene, and electricity), which declined in May. Combined with rising food inflation risks due to El Niño effects causing floods in coastal food production areas, inflation pressures are expected to intensify.
Nonetheless, favorable base effects are anticipated to mitigate the headline inflation rate in the coming months, with Stears predicting Kenya’s inflation rate to range between 3.59% and 5.44%.
In May, both the annual and month-on-month headline inflation rates rose to 5.10% and 1%, respectively.
As June approaches, the impact of implementing the 2023 Finance Act, which doubled the value-added tax (VAT) on petroleum products by 16%, is expected to diminish, according to Stears.
