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Kenya shilling firms after central bank holds rate

07 March 2012, 12:32

NAIROBI, March 7 (Reuters) - The Kenyan shilling firmed against the dollar on Wednesday after the central bank held its benchmark interest rate steady at 18 percent for the third month in a row. 
Policymakers cited a still-risky inflation outlook and concerns about the widening balance of payments for the decision to leave the rate unchanged.     

Analysts said that an 8 percent fall in the currency of neighbouring Uganda after it cut a percentage point from its policy rate last week could have influenced the Kenyan decision.
"The market has interpreted the rate hold by central bank as an indication that the high interest rate regime might be there for a while. That's why the shilling is strengthening," said Robert Gatobu, a trader at Bank of Africa.
At 0645 GMT, commercial banks quoted the local currency at 82.70/90 per dollar, stronger than Tuesday's close of 82.95/83.15.     

The shilling sank to a record low of 107 to the dollar in October due to high inflation and a widening balance of trade gap on the back of high global oil prices.    

Although policymakers in east Africa seem to have quelled the rapid decline in their currencies late last year, unwinding the prevailing high interest rates will require finesse as the outlook for inflation remains risky due to high oil prices.    

Traders said yields on government securities could remain fairly high in the medium-term, attracting offshore investors to the market, supporting the shilling further.    

Yields on government securities rose most of last year to over 20 percent in December from a low of 2 percent in January, but a slow down in inflation in the last three months to 16.7 percent has seen them dip gradually on high demand.    

"Holding the rate means we will maintain the status quo. That might slow yields from coming down as quickly as if they had cut," said Gatobu.   



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