Kenya Shilling Weakens Most in 2 Weeks as Central Bank Cuts Rate

Kenya’s shilling weakened the most in more two weeks as the central bank cut its benchmark rate for the first time in 18 months.

The currency of East Africa’s largest economy weakened 0.7 percent to close at 84.55 per dollar, the biggest one-day decline since June 12. The shilling has strengthened 2.5 percent since May 30, according to data compiled by Bloomberg.

Kenya’s central bank cut its benchmark lending rate for the first time in 18 months to boost the economy as inflationary pressures ease. The Monetary Policy Committee reduced the key rate by 1.5 percentage points to 16.5 percent, according to an e-mailed statement today from the Nairobi-based central bank. Seven out of 12 economists surveyed by Bloomberg predicted a one-percentage point cut, while one forecast a 50 basis points reduction. The rest expected the rate to stay unchanged.

“The market expected a cut which points to the weakening of the shilling,” Jeremiah Kendagor, the head of trading at Nairobi-based Kenya Commercial Bank Ltd., said by phone after the decision was announced “We will be keen to see how the central bank will act to support the shilling if it slides rapidly, either by enhancing its mop up exercise or even selling dollars to meet demand and cushion the shilling.”

The central bank raised borrowing costs by a record 12.25 percentage points in 2011 to help bolster the shilling and curb price pressures following drought. Inflation declined for the seventh straight month to 10.1 percent from 12.2 percent in May, the Kenya National Bureau of Statistics said in an e-mailed statement June 29.

Repurchase Agreements

Kenya sold 4 billion shillings ($47 million) of repurchase agreements maturing in seven days at a weighted average rate of 16 percent, a central bank official, who asked not to be identified in line with policy, said.

The central bank also accepted 1.8 billion shillings of bids for 14-day term auction deposits at 16 percent, 400 million shillings of 21-day TADS at 15.6 percent and 800 million shillings in 28-day deposits at 15.85 percent, the official said by telephone from Nairobi, the capital. The bank has been using its open market operations to reduce the total money supply.

Tanzania’s shilling weakened for the third time this week, depreciating 0.4 percent to 1,587 per dollar. Uganda’s shilling gained the most in almost two weeks, appreciating 0.3 percent, the most since June 21, to 2,466.93 per dollar.

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