Kenyan Shilling Drops as Central Bank Surprises by Holding Rates

Kenya’s shilling weakened after the central bank surprised the market by leaving its main lending rate unchanged to allow previous increases to work through the economy and as the inflation rate fell to a four-month low.

The currency of East Africa’s largest economy dropped as much as 1.3 percent to 102.10 per dollar before paring declines to trade 0.6 percent down at 101.42 by 10 a.m. in the capital, Nairobi. That extends losses this year to 11 percent amid sliding foreign-currency earnings from tourism and tea, the biggest sources of foreign exchange, and as the Federal Reserve prepares to raise interest rates, drawing investors to the dollar.

“The Kenyan shilling is still fundamentally vulnerable to a deeper correction given protracted fiscal and external deficits and how overvalued the local unit became over the past year on a real, trade-weighted basis,” Gareth Brickman, a market analyst at Johannesburg-based ETM Analytics, said in an e-mailed note.

The Monetary Policy Committee kept the key rate at 11.5 percent in the second meeting chaired by Governor Patrick Njoroge. Four of 14 economists surveyed by Bloomberg predicted the decision, while the rest forecast increases of 50 basis points to 200 basis points. Policy makers had raised the rate by a total of 300 basis points in the past two meetings to help bolster the shilling and curb price pressures.

Inflation eased to 6.6 percent in July from 7 percent in the previous month, remaining below the upper end of the government’s 2.5 percent to 7.5 percent target range.

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