Kenya’s Central bank on Tuesday lowered its benchmark lending rate —the Central Bank Rate (CBR)— by 100 basis points citing the country’s low inflation figure and the shilling’s continued stability against major currencies.

The country’s Monetary Policy Committee (MPC) cut the rate at which the Central Bank lends to commercial lenders from 9.5 to 8.5 per cent, though noting the country still faced risks arising from the economic challenges facing the Eurozone -Kenya’s major export market- as well as continued widening of the current account deficit.

“Nevertheless, the latest growth projections for Kenya’s main trading partners in the region remain strong, endorsing a stable outlook for the exchange rate with expectations for increased foreign exchange inflows from regional trade. Furthermore, the prevailing weather conditions continue to support a low and stable short-term outlook for food inflation in spite of the risk posed by floods on food production and distribution,” said the MPC in a statement.

The cut is in line with market expectations, though there is a feeling that banks might not lower their commercial lending rates to reflect the move by the MPC.

“Despite risks emanating from the Euro area and Kenya’s still-substantial current account deficit, the broad outlook is still for relative stability. Given that the rate cut was more than some in the market had expected, we may see some very short-lived pressure on the Kenya shilling, if this emerges at all,” said Razia Khan, the Head of Africa Research at Standard Chartered Bank.

“However, beyond the knee-jerk market reaction (markets had already started to price in an aggressive move ahead of the meeting),our expectation is that the Kenyan shilling will continue to rally, as Kenyan asset markets benefit from increased offshore inflows” she said.

Data from the Kenya National Bureau of statistics (KNBS) inflation for the month of April shows overall month-on-month inflation stood at 4.14 per cent in April 2013 compared with 4.11 per cent in March 2013.

There are concerns in the market that inflation could rise even faster over the next two months over fears that the government could allow an upward review of electricity prices.

With the 2013/2014 budget scheduled to factor in some of the promises made by the Jubilee coalition in its manifesto as well as the added cost of funding devolution the government is expected to turn into the domestic for funding, a move that could push interest rates up and by extension stroke inflation.

“We expect inflation to start being a mild concern probably in July 2013 depending on how the outcome of a requested electricity tariff increase by Kenya Power, VAT Bill, and the upcoming fiscal budget to be read in June 2013 which could see some tax increases,” said SIB.