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Kenya surprises with bigger-than-expected rate cut

A cyclist peddles past power pylons in Nairobi late afternoon February 7.

GEORGE MULALA/REUTERS

Kenya's Monetary Policy Committee softened its nine-months long hawkish stance on Thursday with a bigger-than-expected 150 basis points rate cut, sending the shilling down against the U.S. dollar and drawing criticism from some analysts.

The Monetary Policy Committee cut the central bank rate by 150 basis points to 16.5 per cent, saying its tightening stance had worked, although some risks lingered.

Eight out of 12 analysts surveyed by Reuters had predicted the MPC would cut the CBR, after holding it at 18 per cent for the last six months, due to inflation and to support the shilling.

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"The 150 basis points cut was slightly larger than consensus expectations for a 100 basis points cut and could thus move the Kenyan shilling somewhat on expectations that the CBK will cut rates at sharper increments than expected," said Mark Bohlund, senior economist at IHS Global Insight in London.

The shilling weakened to 84.7 per dollar in after-hours trading, from 84.25 per dollar before the decision, Reuters data showed. But the committee warned of outstanding threats to inflation and currency stability, mainly due to a current account deficit, which was still high in May at 11.3 per cent.

The MPC said it would revert to bi-monthly policy meetings, shifting from monthly meetings which were adopted late last year at the height of an inflation and currency crisis.

"Reverting back to bi-monthly meetings could prompt fears that the central bank is 'taking the eye off the ball' amid what are still very uncertain circumstances both domestically and globally," Bohlund said.

Still, some analysts said the move to cut rates boldly would not do a lot of harm in the foreign exchange market, citing the central bank's continuous open market operations.

"It would be wrong to see this rate move as KES-negative in any way. Real interest rates remain substantial in Kenya, and may increase ahead of the September MPC meeting, as inflation continues to decelerate," said Razia Khan, head of Africa research at Standard Chartered.

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