Kenyan shilling weakens as market awaits rate decision

The Kenyan shilling weakened against the dollar on Tuesday as banks bought dollars ahead of a Central Bank policy meeting, but traders were cautious due to uncertainty as to whether the bank would start cutting interest rates or keep them on hold.

High interest rates have recently supported the shilling, ranked as one of Africa's most liquid currencies, but the shilling is expected to come under pressure if the bank does begin easing monetary policy.

Neighbouring Uganda's currency has fallen more than 8 percent since late last week after its central bank sliced a percentage point off record high interest rates.

Kenya's inflation rate fell more than expected to 16.7 percent in February from 18.3 percent in January, and all 12 analysts surveyed by Reuters agreed the next move in rates would be down.

However, half said it was too early for the bank to cut rate at Tuesday's meeting as dry weather and higher global oil prices could well put upward pressure on food and fuel prices.

At 0745 GMT, commercial banks posted the local currency at 83.30/50 per dollar, from 83.20/40 on Monday's close.

"The market is a bit jittery ahead of the MPC meeting. We've seen interbank players buying dollars," said Dickson Magecha, a trader at Standard Chartered Bank.

"It's more geared towards them holding it at 18 percent and maybe cutting in April if inflation falls further. But it's not clear if they will cut or hold today."

Traders said they expected a rate cut would lead to a weakening of the shilling as it could herald lower commercial bank interest rates, which could boost import orders.

The local currency sank to a record low of 107 to the dollar in October 2011 in the face of high inflation, caused by a widening balance of trade gap due to high global oil prices.

The currency rebounded after the Central Bank raised interest rates to 18 percent in December.

Comments by Finance Minister Robinson Githae last week that he had instructed the central bank to prevent the shilling from strengthening beyond the Sh82 per dollar level also caused jitters among importers, who have been buying more dollars.

"The market outlook remains very mixed with the drop in the February inflation number suggesting a possible rate cut that could cause the shilling to weaken," Bank of Africa said in a daily report.

-Reuters