Kenya`s Slashes Interest Rate To 8.5 Pct

Analysts said the central bank`s actions were in line with the rest of the world, but may worsen inflation by increasing the money supply.

Kenya's central bank cut its benchmark lending rate to 8.5 percent from 9.0 percent and reduced cash ratio requirements to 5 percent hoping to boost liquidity and spur consumer spending during the festive season.

"This will enhance liquidity in the banking system and nurture growth in the recovery process," a bank statement said after a meeting of its monetary policy committee.

East Africa's largest economy has suffered from a bloody post-election crisis at the start of 2008, then the impact of the global economic downturn. The government forecasts 4.5-6 percent growth this year, down from 7 percent in 2007.

Analysts said the central bank's actions were in line with the rest of the world, but may worsen inflation by increasing the money supply.

"This is essentially following what has been happening in global markets," said Sunil Sanger, managing director of CFC Stanbic Financial Services. "In an inflationary environment...we could end up fuelling inflation through this."

Inflation has shot up this year in Kenya.

Latest data on Monday put annual inflation for November at 29.4 percent, up from 28.4 percent in October.

Core inflation, which excludes food, eased, however, to 12.3 percent in November compared with 13.0 percent previously.

"The November 2008 data points to inflation continuing to be a challenge. This is mainly driven by food prices," the bank added in its statement on the rate cut.