The Central Bank of Kenya slashed its main interest rate by 350 basis points to 13.0 percent as inflation had returned to the government's target band and the global slowdown would have a dampening effect on domestic growth.
Economists had expected the bank to cut rates after annual inflation in August fell to 6.1 percent - the lowest since July 2011 - from 7.7 percent in July. The bank said inflation was now within the upper band of 7.5 percent set by the government for the fiscal 2012/13 year.
Kenya's central bank went on an aggressive rate rising campaign in September 2011, hiking rates from 6.25 percent to a peak of 18.00 percent, to bring down inflation, which peaked at almost 20 percent in November.
But while inflation started to ease, the economy began suffering from the high interest rates and in July the central bank cut rates by 150 basis points. Kenya's economy expanded by 3.5 percent in the first quarter, down from 4.80 percent in the fourth.
Kenya's central bank said the overall decline in inflation was supported by easing demand pressures in the economy and continued falls in food and fuel prices.
"These developments supported a positive outlook for a continued decline in inflation," the bank said in a statement following a meeting of its Monetary Policy Committee.
It also said that the banking sector remains strong and stable, the policy environment remains strong, and foreign exchange reserves could cover 4.2 months of imports, which would cushion the market against external shocks and improve confidence.
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