* Cuts by bigger-than-expected 150 bps, divides analysts
* Shilling weakens after the rate cut
* Risks remain to prices, fx stability
By Duncan Miriri
NAIROBI, July 5 Kenya's central bank declared a
measure of victory over high inflation and currency volatility
after a months-long battle, cutting its benchmark lending rate
by a bigger-than-expected one and a half percentage points.
While a sharper-than-forecast fall in inflation last month
offered scope for a rate cut, particularly after disappointing
first quarter growth figures, the bank was left balancing the
need to spur output and protect a still vulnerable currency.
The regulator came under fire last year for sacrificing the
currency and prices at the altar of economic growth, when
soaring inflation and currency turmoil engulfed the region. It
atoned in the final quarter of 2012 when it jacked up rates.
The Monetary Policy Committee on Thursday cut the central
bank rate by 150 basis points to 16.5 percent,
saying its tightening stance had worked to cool inflation and
stabilise the shilling.
"The Committee noted that the implementation of its monetary
policy framework is working," it said in a statement, citing
falling inflation, foreign exchange rate stability and improved
hard currency reserves position.
Year-on-year inflation fell for the seventh
straight month in June to 10.05 percent from 12.22 percent in
However, the MPC warned of lingering threats to prices and
currency stability, mainly due to a current account deficit,
which it said was still high in May at 11.3 percent of GDP.
Economic growth slowed to 3.5 percent in the first quarter
of this year from 5.1 percent a year ago - the slowest first
quarter growth since 2008 - as high commercial lending rates hit
business like the key construction sector.
"TAKING EYE OFF THE BALL"
"We sit on the cusp of an easing cycle which will total
about 600 basis points through year-end, and the MPC whilst
re-establishing their inflation-busting credentials, are also
making sure the slow down does not run away from them," said Aly
Khan Satchu, an independent trader and analyst.
Some analysts cautioned the policymakers risked undermining
the shilling with larger-than-expected cuts.
"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 MPC said it would revert to bi-monthly policy meetings,
shifting from monthly meetings which were adopted late last year
at the height of the 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.
The shilling weakened to 84.7 per dollar in
after-hours trading, from 84.25 per dollar before the decision,
Reuters data showed.
Still, other analysts said the move to cut rates boldly
would not harm the shilling, 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.
(Additional reporting by Beatrice Gachenge and Kevin Mwanza;
Editing by Richard Lough)