NAIROBI: The Kenyan shilling weakened on Wednesday as banks squared positions ahead of an interest rate decision, while stocks closed a fraction higher.
At close of trade at 1300 GMT, commercial banks quoted the shilling at 88.70/80 to the dollar, compared with Tuesday's close of 88.60/70.
At its meeting on Wednesday, the central bank held its benchmark lending rate at 8.50 percent, in line with what traders had earlier expected.
The decision was announced after markets had closed.
Kenya's inflation rate in August rose to its highest level since June 2012, making it more likely the central bank will lift interest rates in coming months.
Chris Muiga, senior trader at National Bank, said the shilling was also under pressure due to falling dollar inflows from the tourism sector.
Kenya's tourism business, a top foreign exchange earner, slid into crisis this year because of frequent deadly attacks blamed on Islamists from neighbouring Somalia.
Tea dollar earnings have also fallen due to an oversupply of the commodity as a result of favourable weather in Kenya.
"The problem is not the demand (for dollars). The story is the supply side. Supply is muted, especially due to lower (dollar) flows from tourism," Muiga said.
Traders said shilling liquidity conditions had improved due to government departments starting to spend money from the budget 2014/15 (July-June) fiscal budget.
Delays by the government in releasing funds to departments and local authorities caused a liquidity crunch, leading to overnight borrowing rates on the interbank market shooting up.
The shilling, which has lost about 3 percent this year, hit its lowest level since December 2011 last Tuesday when it traded at 88.80/90 to the dollar before the central bank intervened.
On the Nairobi Securities Exchange, the main NSE-20 Share Index was barely higher, rising 0.07 points at 5,163.28 points.
Centum Investment rose 4 percent higher to 53.50 shillings, a day after announcing that together with its local partner, the investment firm had won a government tender to build a 1,000-MW, coal-fired power plant.
On the secondary markets, government bonds valued at 5.5 billion shillings ($62 million) were traded, compared with 3.86 billion shillings traded on Tuesday.
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