Reports Leo Odera Omolo

A week after the joint presentation of the annual budget for the expenditure of governments of Kenya, Tanzania and Uganda for the financial year 2011/2012 the currencies of the three sister states touched new low in trading against the US dollar, putting pressure on Central Banks across the region to raise interest rates in the face of accelerating inflation.

Kenya shilling breached the Kshs.90 level against the dollar, while the Ugandan shilling touched US 2,428 to the dollar and the Tanzanian shilling traded at the record lowest rate of Tshs 1,595 to the dollar.

In the coming weeks, demand for the dollar, especially from the importers in the energy sector, is expected to intensify pressure on the East African currencies.

As importers – mainly in energy and food sectors- pass on the extra costs, inflation is likely to remain high within the region, stifling growth in some key areas.

Moreover, if commercial banks anticipates that local currencies will lose to the dollar, they will hold onto their dollars, further reducing supply.

Central banks have in the past tried to rein in speculative activities by commercial banks with little success.

There have also been attempts to mop up local currencies through repurchase agreements but with limited success.

The only tool that the three central banks are likely to deploy is a hike in key interest rates, such as the Central Bank Rates, the rate at which banks borrow from them.

So far, the Central Bank of Kenya has preferred a moderate increase of 25 basic points to the CBR. But with the shilling trading at record lows, the rate rise is expected to double to 50 basis points at the next Monetary Policy Committee meting.

Analysts said should the benchmark interest rate rise, commercial banks will also read from the same script, increasing the cost of borrowing to consumer and businesses.

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