Kenya's 2011 shilling depreciation and monetary tightening

The Kenyan shilling depreciated by about 5.3% against the US dollar over 2011, closing the year near 85 per dollar compared with roughly 80.75 at the end of 2010, and at one point weakened past 86, an all-time low at the time. The Central Bank of Kenya attributed much of the pressure to external forces, particularly the eurozone sovereign-debt crisis, which drove a global flight to the dollar as a safe haven and pulled funds out of frontier markets like Kenya's, compounded domestically by a widening current-account deficit and double-digit inflation well above the bank's target. In response, the Monetary Policy Committee shifted from a gradual to an aggressive tightening stance, raising the Central Bank Rate from 5.75% in January 2011 to 18% by the end of the year to make shilling-denominated assets attractive enough to stem the outflows and anchor inflation expectations. The tightening worked with a lag: the shilling stabilized and then strengthened in the final two months of 2011 as the rate increases took hold. The episode became a reference case the CBK cited in its own published assessment of what drives and corrects shilling depreciation episodes.