Kenya holds key interest rate, inflation on target
* Says inflation within target
* External risks to macro-economy persist (Adds details, background)
By George Obulutsa and Kevin Mwanza
NAIROBI, Sept 3 (Reuters) - Kenya's central bank held its key lending rate at 8.50 percent on Tuesday, in line with market expectation, saying inflation was within an acceptable margin of its medium target.
A Reuters poll ahead of the decision had forecast Kenyan policymakers would leave the bank's benchmark rate unchanged until at least the end of the year to help counter inflationary pressures and a bearish currency.
The bank's Monetary Policy Committee said the short term outlook for inflation was stable. The new VAT bill which came into effect this week would, it said, contribute inflationary pressures, but these were expected to be mild.
"The Committee concluded that there were no demand-driven inflationary pressures which would require a revision of its monetary policy stance," the MPC said in a statement.
Kenya, east Africa's biggest economy, is projected to grow 5.8 percent this year from 4.6 percent in 2012.
There were, however, festering risks to its macro-economic outlook emanating from the political instability in the Middle East and North Africa, which the MPC said had led to higher oil prices and could hurt Kenya's important forex-earning tea exports.
"These developments coupled with the high current account deficit remain a threat to macroeconomic stability," the MPC said in a statement.
The bank said the Treasury's borrowing programme was on target and not putting pressure on interest rates. Movements in short-term rates were aligned to the central bank rate, the MPC said.
"This suggests a degree of comfort with current short-term yields," Razia Khan, head of Africa research at Standard Chartered bank. "The CBR itself is seen on hold at least until the end of the year."
Mark Bohlund, senior economist for sub-Saharan Africa at IHS Global Insight, agreed, pointing to the central bank's consistent policy stance over the past few months.
"Nonetheless, both domestic and external developments indicate that the Central Bank of Kenya will move towards tightening its policy stance in 2014."
Treasury Secretary Henry Rotich said on Tuesday Kenya may seek as much as $2 billion from its debut Eurobond issue, double the previously stated $1 billion, an amount analysts said could be expensive to borrow.
The rate decision came after the local currency market closed. Traders had said they expected the shilling to weaken towards its support level of 87.70 to the dollar in the event of a hold. (Editing by Richard Lough, Ron Askew)
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