UPDATE 1-Kenya holds benchmark interest rate for fifth month
* 3-month annualised inflation hit 9.2 pct in April from 7.7 pct in March
* Bond yields have fallen this year as inflation slows
* Shilling has recovered from October record low on tight policy (Adds analyst comment, detail, background)
By David Clarke
NAIROBI, May 3 (Reuters) - Kenya's central bank held its benchmark lending rate at 18 percent for a fifth month in a row on Thursday as expected, saying lingering price pressures still needed to be squeezed out of the economy.
The Central Bank of Kenya's Monetary Policy Committee (MPC)said even though the year-on-year inflation rate fell to 13.06 percent in April from 15.61 percent in March, underlying food and fuel price pressures had increased.
The central bank, which was widely criticised for being to slow to raise rates when inflation surged last year, has been especially cautious so far this year, repeatedly flagging risks to the inflation outlook and high credit growth.
The consensus forecast in a Reuters poll of 12 analysts was for the Central Bank Rate to be held at 18 percent.
The decision came after the market close, though analysts said it was likely to support the shilling against the dollar as the April inflation data had boosted expectations the central bank might start an easing cycle this month.
"The decision to keep interest rates on hold today does not alter the view that we will see a significant rally in Kenyan bonds over the medium term, as the policy rate is gradually normalised over the coming years," said Razia Khan, head of research for Africa at Standard Chartered Bank.
"This should lend some support to the Kenyan shilling, even as interest rates come down from their current highs," she said.
A central bank survey for April showed that the private sector expected inflation to keep declining, the exchange rate to stay stable and the economy to remain resilient, but policymakers said price rises needed to slow further.
"These considerations showed that there is still some lingering pressure on inflation that could give rise to adverse inflationary expectations," the MPC said in a statement.
"These must be addressed to facilitate a return to high economic activity supported by a low inflation regime," it said.
CURRENT ACCOUNT GAP GROWS
The central bank reiterated that private credit growth needed to come down. A surge in credit last year boosted import purchases. Coupled with high fuel import prices, this put pressure on the currency and increased the trade deficit.
The bank said the current account deficit widened to 13.6 percent of gross domestic product in March, and this continued to pose a threat to both exchange rate stability and future easing of inflation pressures.
While private sector credit growth has slowed this year, it was still running at 24 percent in March.
"Private sector credit growth is ... still too quick for their liking and I don't see them cutting until they have that under control," said Duncan Kinuthia, head of trading at Commercial Bank of Africa.
"Otherwise, they'll run into the same issues they had last year, the exchange rate could come under threat, balance of payments and so on," he said.
The central bank in Uganda faced a similar situation to Kenya at the start of the year. It cut its benchmark lending rate in both February and March, but the currency slumped after the second cut, risking an increase in imported inflation.
The Bank of Uganda has since held the rate unchanged at 21 percent, a move that has helped the currency gain ground.
Some analysts, however, said the Kenyan central bank was getting policy wrong again, this time by being too cautious after missing the tightening boat in 2011.
"I think the central bank are being overly conservative and that they should have been cognisant of the sharp move in market rates. In some respects, this decision is as egregious as the decision not to hike was last year," said independent Nairobi-based analyst Aly Khan Satchu.
For the full MPC statement, click on