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Kenya shilling weakens, tea, cbank may support

10 January 2012, 13:09

Nairobi - The Kenyan shilling weakened for a second straight session on Tuesday as importers sought U.S. dollars, but traders said a tea auction and the Central Bank should offer support later in the week.    

The Central Bank, which was heavily criticised last year for being slow to rein in inflation and shore up the tumbling shilling, has hoovered up a total of 11.65 billion shillings ($134 million) through repo agreements this year. It has also sold an unspecified amount of dollars and is expected to continue its efforts to keep the currency stable.
The weekly tea auction is held on Tuesday and inflows would start trickling into the market afterwards.   
"The shilling is facing some headwind from corporates' demand for the dollar, but guys are expecting it to strengthen a bit on tea inflows as we approach mid-week," said Ignatius Chicha, head of markets at Citibank. "Constant dollar selling by central bank and taking out liquidity could also support." 
At 0740 GMT, commercial banks posted the shilling at 87.30/50 against the dollar, weaker than Monday's close of 87.15/35.   
Traders said the market was seeking direction from Wednesday's Monetary Policy Committtee (MPC) meeting, at which the central bank is expected to keep the base rates on hold at 18 percent to support the economy while containing inflation.
For much of 2011, policymakers failed to persuade markets they had a clear strategy for fighting double-digit inflation and supporting the shilling which tumbled 25 percent against the dollar to a record low of 107 in October.   

The MPC eventually took action by raising key interest rates by 400 basis points in October, 550 in November and 150 points in December. Analysts expect the bank to hold fire this time around to see if the aggressive tightening has worked.   

Inflation eased to 18.93 percent in December from 19.72 in November, the first decrease since October 2010, and traders expect it to keep edging lower in the months ahead.
"The consensus in the market is that they will pause the rate at this level since inflation is showing signs of coming down," said a trader at one commercial bank.   

"They may use other tools such as the cash reserve ratio,repos and selling dollars directly to the market, but not raising the central bank rate."   



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