CENTRAL Bank of Kenya has said its recent increased interest in the money market is to ensure prices in the country are stable by forestalling excessive volatility in the exchange rate of the local currency.

Governor Njuguna Ndung'u said it was important that the CBK carry out its mandate to protect the economy by closely watching money supply in the market.

CBK has been seen as trying to interfere with the foreign exchange movements despite Kenyan currency trading in a liberalised market by selling dollars directly to commercial bank and mopping up excess liquidity.

This has been seen as a move to protect the currency, to prevent it from weakening in the face of political uncertainty over long wait for results of the presidential winner in Monady's poll.

Ndung'u said: "The Central Bank deploys its instruments to manage liquidity along the predetermined path consistent with the monetary policy stance. This involves the mop up or injection of liquidity required, using either repos, term auction deposits or foreign exchange sales or purchases."

According to a Reuters report posted Thursday, the CBK had entered a repurchase agreement to mop up Sh10 billion and on Friday the same news medium said the bank was looking to mop up another Sh8 billion.

Ndungu reiterated that it was impossible to support a direction in the movement of the exchange rate in a liberalised market and it was also not "sensible".

"Once a country opts for a floating exchange rate with an open capital account, it cedes the power to defend a specific level or direction of the exchange rate," noted the governor.

CBK said foreign exchange reserves were also an indirect instrument of monetary policy and as such can be used for managing liquidity in the local economy. So far, the shilling is down by 0.9 per cent against the dollar for the year.

Meanwhile a working paper dubbed forecasting and monetary policy analysis in low income countries recently released by IMF noted that there was a lot of uncertainty surrounding the analysis of monetary policy in Kenya.

The paper said it was important that a lot of detail be looked into as regards the micro structure of the food sector and its exposure to domestic and international shocks.

The paper added that other supply shocks, prices, wage "stickiness" and the implications of limited financial participation and the role of alternative instruments such as foreign exchange interventions also be keenly focused for a more effective policy.