Let's put things in context. We all know how money supply is grown (credit growth). So looking at the Deposit corporation survey the change in money supply is 132 b from June 2011 to October 2011. At the exact same time the change in FCD (a component of money supply) was 78 b representing 58% of the increase. During this period there was a massive depreciation in currency. so FCD must have some bearing on $/Ksh and result in a weaker currency. It's likely due to increase remittances, but you'd have to then assume most remittances coming in aren't converted into ksh (thus kept in deposit), which is not likely (why wud they do this-unless they're speculating or have little faith in kes).

We're not agreed at all mate, but let's agree to disagree. Let move on to a different subject.

I wonder if the CB is in fx today... the intervention is pointless. Seems they want to be seen to be doing something. They also need to remove those fx restrictions and start negotiating with foreigners to increase capital inflows.

Kizee- as bidu says, its getting tedious/boring. Let it go

If M3 really is/was the issue, CBK should have jacked the reserve ratio. Unconventional? Innovative? Neither. Its how the Chinese brethren deal with money supply overhangs...

@mainat. Didn't CBK did that. CBR hikes are short terms measures and CRR is longer term. Don't take my word for it, just look at the aggressive bank balance sheet expansion in 2011 is a really important factor. The wazua analysts can calculate the level of leverage (assets:equity) for the big banks that creates pressure on capital ratios. What were the fast growing credit lines for most banks in Q3?

Liquidity had a part to play in the BOP change and how the imports were financed created the money supply/fx link. As soon as M3 contracted, so did private sector credit and foreign currency deposits (those aren't remittances)-that can't be coincidence (cos the $/Ksh followed).

@kizee. happened back during April-May 2008 when we had the short-lived safaricom credit bubble and around March-April 2009 when equity markets tanked. So to speed up GDP growth in May 2009, money supply (liquidity/leverage) had to be aggressively expanded-resulting in the CB creating the arbitrage through the reverse repo auctions and shortly after we got an IMF allocation (justifying worsening BOP, but with a 1 year expiry-result in CB purchasing $ in 2010).

The budget read in June 2009 became overly inflated and infrastructure focused. So the cycle of increased leverage and worsening BOP had it's origins back then following a major contraction in money supply. They can only contract for some time this time, so I suspect a few months from now the policy will loosen.