Photo: Monicah Mwangi/The Star

Kenyan shilling.

Bankers expect the Central Bank of Kenya to start easing interest rates starting with today's Monetary Policy Committee. Core inflation, which excludes food and fuel, had been cited as the reason the MPC opted to retain its key lending rate at 18 per cent at its last meeting but this has now come down, banks said. "The market expectation is that there will be a rate cut," Grace Makoko, the new head of Treasury at Standard Chartered Bank said. "Whether its a token cut, 50 basis points or 100 basis points the market expects a rate cut."

The sentiments echo those of Razia Khan, Standard Chartered Bank PLC head of research for Africa who after the last MPC meeting predicted that rates would begin to come down. "We believe it is only a matter of time before inflation does start to decelerate more meaningfully. Barring any new external shocks, CPI may be in single digits by September, perhaps sooner," said Khan in a note. "Although the market is likely to be disappointed by today's decision to keep interest rates on hold, the start of a more pronounced easing cycle cannot be very far off."

Bankers polled by Reuters also said they expect a rate cut later today. Eight out of 12 analysts surveyed predicted the central bank's Monetary Policy Committee would cut its Central Bank Rate (CBR) after holding it at 18 percent for the last six months. "We think it will be a cut considering that inflation is now 800 basis points below the CBR. But they will still have to exercise caution and cut by 100 basis points even though there is room for a bigger cut," said Shalin Gudka, treasurer at Kenya Commercial Bank.

Year-on-year inflation fell for the seventh straight month in June to 10.05 percent while growth slowed to 3.5 percent in the first quarter of this year from 5.1 percent a year earlier. One analyst anticipated a cut of 200 basis points, while seven expected a cut of 100 basis points, which was the median forecast. Four saw a hold decision. "The central bank is likely to keep rates on hold despite inflation slowing because of concerns over the shilling. Its value against the dollar remains volatile and the euro zone crisis continues to have an adverse impact," said Angus Downie, foreign exchange and interest rates strategist at Ecobank.