UPDATE 2-Kenya c.bank cuts key rate 200 bps as inflation falls

Wed Nov 7, 2012 10:36am EST

Related Topics

* C.bank cuts benchmark rate by 200 bps to 11 pct

* Markets to take rate cut in stride, cut expected

* Build-up in forex reserves to cushion shilling (Rewrites throughout)

By Duncan Miriri

NAIROBI, Nov 7 (Reuters) - Kenya's central bank chopped its benchmark lending rate to 11 percent from 13 percent on Wednesday, following up on an even bigger cut in September, to support the economy as inflation comes back down.

The central bank of east Africa's largest economy is trying to get monetary policy back on an even keel after rapid credit growth last year caused the shilling to slump and inflation to soar, forcing the bank to ramp its key rate up to 18 percent.

The cut matched the forecast of economists polled by Reuters and analysts said markets were likely to take the decision in their stride.

"With inflation currently just a touch over 4 percent, and likely to decelerate further in the near term, we feel that a rate cut of this magnitude is easily justified," said Razia Khan, head of research for Africa at Standard Chartered in London.

The Monetary Policy Committee, which began easing again this July, said inflation had fallen to within its preferred range while credit growth had slowed to the government's target level.

Inflation fell to 4.14 percent last month, well within the government's target of 3-7 percent.

The economy grew at its slowest rate since the end of 2009 in the second quarter of this year compared with the first, prompting some analysts to conclude that the central bank needed to don its pro-growth hat once again.

The MPC also said in its statement that the economy still faces risks, mainly from volatile international oil prices, the effects of the global economic slowdown and balance of payments pressures from a high current account deficit.

The committee has now cut the benchmark rate by a total of 700 basis points since July. But it seems to have opted for a slightly more gradual easing after its record 350 bps cut in September.

"With oil prices and the current account still seen as risks, a more prudent approach to rate easing is adopted," Standard Chartered's Khan said.

The MPC said foreign exchange reserves held by the central bank had risen to $5.27 billion this month after the disbursement of a tranche of the government's extended credit facility with the International Monetary Fund.

"The build-up in reserves provides a further cushion to the foreign exchange market," the MPC said.

Analysts said the shilling could recover some of the ground it had lost in the run-up to the rate decision.

"We might see a bit of correction on the shilling as it recovers from the dip we saw as some people front-ran the decision by buying dollars," said Ignatius Chicha, head of markets at CitiBank Kenya.

A jump in the benchmark share index on the Nairobi bourse to 4,147 points last month from 3,972 points in the previous month showed growing investor confidence in Kenya, the MPC said.

"A stable currency, low and stable inflation, low bad debts and the prospect of economic recovery all paint a bright picture, although of course political risk will have to be closely watched," Khan said.

Kenya is due to hold general elections next March, the first vote since a disputed presidential election that led to violence in at the start of 2008. (Editing by James Macharia and Hugh Lawson)

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