Hopes by Kenyan borrowers that the Central Bank would strike a blow for cheaper money were dashed on Tuesday when the Monetary Policy Committee retained the indicative rate at 18 per cent to shield the shilling from renewed pressure.
The shilling has over the last two weeks raised fears of increased inflationary pressure after weakening from 83 to 87 units to the dollar before recovering some lost ground.
The MPC attributed the weakening of the shilling to global demand for the dollar arising from the turmoil in the Euro zone, whose banks are facing a debt crisis.
"The global foreign exchange markets witnessed a resurgence of turbulence in May 2012 mainly attributed to the instability in the Euro Zone,” Central Bank governor Njuguna Ndung’u said on Tuesday.
“As a consequence, the dollar has strengthened globally as investors shift from euro to dollar denominated assets”.
CBK used up over $245 million in foreign exchange reserves to intervene in currency markets as the shilling lost from an average of about Sh82 to the dollar to around Sh86 by Tuesday.
As at last Friday, the reserves stood at $4.425 billion down from $4.67 billion at the beginning of May this year.
While some analysts had cited similar concerns, others had earlier said that it was time to reduce the policy interest rate in order to stimulate economic growth.
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