INSTANT VIEW 4-Kenya slashes rates by 75 basis points

NAIROBI, July 28 (Reuters) - Kenya's central bank unexpectedly slashed its benchmark interest rate to 6.00 percent from 6.75 percent on Wednesday and said there was room for banks to cut their own lending rates further. [ID:nLDE66R1YR]

Only one analyst out of seven polled by Reuters had forecast a cut after Wednesday's Monetary Policy Committee meeting.

ANALYST COMMENTS

DUNCAN KIMANI, HEAD OF FIXED INCOME, BANK OF AFRICA KENYA

"This will bring some sobriety to the market because people were panicking that rates were about to shoot up.

"This shows a commitment from the central bank that it will keep rates low. They have also been doing this through reverse-repos, occasional cuts to the cash reserve ratio and through talking to the markets.

"The governor has been consistent that for as long as the recovery is slow he will keep rates low.

"This has already caused banks to start thinking about lowering their rates. They thought rates had hit rock bottom but now they could sink even lower.

"One factor hindering the short-term rate dropping lower had been the overnight rate that is at around 1.2-1.4 percent. If the overnight rate goes down further, which it seems sure to do, then there is room for the 91-day to fall lower. There could be a lag of about one month."

LISA LEWIN, HEAD OF SUB-SAHARAN AFRICA ANALYSIS, BUSINESS MONITOR INTERNATIONAL

"It is not of great surprise that rates were cut -- after all, the inflation picture is relatively benign and the central bank governor has been highlighting the fragile nature of the recovery. The size of the cut is somewhat surprising, though. It could send a signal that the economy needs a strong boost to get back on its feet."

KARANJA NDUNGU, FIXED-INCOME TRADER, TSAVO SECURITIES

"The market has reacted positively. Some requests for (bond) trades are trickling in. At least the fear of rates turning has been dispelled. It will restore stability and direction."

ALY KHAN SATCHU, NAIROBI-BASED INDEPENDENT ANALYST

"He has wrong-footed everybody. I think the central Bank is experimenting with (the governor's) version of economic shock therapy after a period of trying the gentle art of persuasion.

"He has reset the narrative for the government of Kenya yield curve with the sticker shock of a 75 basis point cut designed to snap the resolve of the commercial banks.

"This is a tilt aimed at snapping the spread between the repo rate and the commercial lending rate."

DICKSON MAGECHA, TRADER, DIAMOND TRUST BANK

"With inflation coming down, CBK is signalling the low rate regime will be supported for now. They are also looking to support the economic growth momentum we have seen in recent quarters."

RAZIA KHAN, HEAD OF RESEARCH, AFRICA, STANDARD CHARTERED

"The Central Bank of Kenya MPC surprised markets by cutting its Central Bank rate by a massive 75 basis points to 6 percent against consensus expectations of "no change". The move will be taken as a clear signal of encouragement to commercial banks to cut their loan rates further.

"In a sense, recent stabilisation of the Kenyan shilling has provided the authorities with a window of opportunity to act on interest rates. The shilling selloff in the midst of the euro area crisis had represented one of the key risk factors to price stability going forward. It is now judged to be less of a concern.

"Moreover, the authorities will have been encouraged by recent low levels of inflation. Given an assessment of adequate food supply, FX stability and declining energy prices, the inflation threat itself is considered more benign.

"While growth was viewed as "satisfactory", and the MPC were encouraged by the decline in short term interest rates, and the rise in domestic credit to 26.6 percent y/y, in their opinion there is still room to provide even more of a stimulus.

"How will the market react to this move? It is unlikely, given recent developments, that the appreciation trajectory of the shilling will stall on this news. Should the referendum pass peacefully, further gains in the near term remain probable.

"Although recent T-bill auction results had suggested the beginnings of a potential reversal of the downtrend that has been in place for much of the year, this surprise interest rate move by the CBK should provide at least a short term boost to money market sentiment.

"There was never any prospect of a policy-driven tightening any time soon. With the surprise 75 basis point cut in the CBR, the Central Bank of Kenya is sending a clear signal of its intent: further policy accommodation, further stimulus, and lower lending rates please." (Reporting by Richard Lough and Duncan Miriri; Editing by David Clarke)