NAIROBI: Kenya's shilling weakened 0.3 percent on Tuesday on the back of corporate demand for the dollar ahead of the Christmas holiday season and heavy liquidity in the money market, traders said.
Market players said the shilling had shrugged off an unexpected cut to Kenya's 2013 and 2014 growth forecasts by the World Bank, saying inflation, interest rates and the current account were stronger drivers for the local currency in the short term.
Commercial banks quoted the shilling at 86.70/86.90 at 0845 GMT, weaker than Monday's close of 86.50/86.60. Support for the shilling was seen at 87, traders said.
"The market is liquid with shillings, interest rates are falling and that is making the shilling weaker," said Sheikh Mehran, senior trader at KCB Bank. He said the market was watching to see if the central bank would continue to mop up liquidity.
The regulator said it was seeking to drain shillings from the market for the third consecutive session on Tuesday.
Andlip Nazir, senior trader at I&M Bank, said firms were bringing forward their usual end-month demand for the US currency before the Christmas holiday.
The World Bank cut its growth forecast for Kenya for 2013 and 2014 to around 5 percent, citing low levels of government spending and high interest rates charged by commercial banks.
"Going forwards the central bank will have to react to these numbers," said Nazir. "We need interest rates to come down so that growth can pick up."
"If interest rates do come down then we'll see the shilling weaken further but that should not be the primary concern of the central bank."
Razia Khan head of Africa research at Standard Chartered bank, said the World Bank's data looked premature and said she was doubtful it would put pressure on the central bank to cut rates further.
The central bank held its policy lending rate at 8.50 percent at its last meeting in November, saying inflation was within an acceptable margin of its medium-term target of 2.5 percent to 7.5 percent.
The country's year-on-year inflation rate fell to 7.36 percent in November from 7.76 a month earlier. This has increased expectations the central bank will keep interest rates on hold when it meets in January.
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