With the depreciation of the shilling, Kenyans watched as the shilling continued to weaken against the dollar. This was later to be followed by rising inflation. This was blamed by some on the fuel (high cost of imported oil) while others blamed the Central Bank of Kenya, accusing the Governor of incompetence and inability to tame the weakening shilling. Some drastic measures were adopted, such as: The Central Bank suspended the dollar transactions by the commercial banks whom it accused of hoarding the dollar for speculative purposes and, instead, decided to carry out the transactions itself. The Central Bank increased the base lending rates.

i. Discuss the implications of the above measures and how they have succeeded in taming the shilling as well as reducing inflation.

ii. In the attempt to solve the exchange rate, the rate of inflation could increase. Explain. 

Public Answer

WGDVSY The First Answerer