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UPDATE 2-Kenya seeks credit growth with big rate cut

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* Seeks to boost lending with bigger-than-expected cut

* Cbank says economic fundamentals outlook positive

* March vote to determine pace of easing-analysts (Recasts)

By Duncan Miriri

NAIROBI, Jan 10 (Reuters) - Kenya's central bank cut its benchmark lending rate by a higher-than-expected margin on Thursday in an effort to raise the level of commercial banks' lending to the private sector.

Although policymakers embarked on an easing cycle in July, commercial banks' lending rates have remained stuck at about 20 percent, curbing economic growth ahead of a presidential election set for March.

The Monetary Policy Committee (MPC) cut the benchmark rate by 150 basis points to 9.5 percent. The consensus forecast was for a one percentage point cut. The MPC has now cut 8.5 percentage points since the easing cycle started.

"To enhance the monetary policy stance and its outcomes as well as increase the uptake of private sector credit and re-align interest rates in the economy, the Committee decided to lower the Central Bank Rate," MPC said in a statement.

There was no immediate market reaction to the cut with the shilling trading steadily at 86.60/80 per dollar, a new seven-month low.

"The shilling could weaken a bit more in coming weeks as the market adjusts to the rate cut, but not by much since the market had already factored in the rate cut," said Robert Gatobu, a trader at Bank of Africa.

The banking sector had shown it was in robust health after the ratio of gross non-performing loans inched down to 4.6 percent last November from 4.7 percent in the previous month, the central bank said.

Market participants welcomed the bigger cut, saying economic growth needed a shot in the arm.

"The economy needs all the encouragement it can get because it has been sub par throughout 2012," said Aly Khan Satchu, an independent trader and analyst.

Still, analysts said the future direction of monetary policy would be determined by a presidential election scheduled for March 4. The last vote in 2007 resulted in tribal violence and convulsed the economy.

"Against the backdrop of the upcoming elections, and given our expectation that inflation may have bottomed and could edge marginally higher over the next few months, the central bank may opt for a more cautious monetary policy approach," said Markus Ridle, sub-Saharan Africa economist at Absa Capital.

ROOM FOR MORE

Annual private sector credit growth rose for the first time in November since the second half of 2011, rising by 9.07 percent compared with 7.12 percent in October, the central bank said.

"The central bank needs to cajole by all means necessary the banks to reduce their lending rates because these remain stubbornly high and a toll charge on the economy," Satchu said.

Analysts said the country's economic fundamentals remained positive, giving the MPC room to provide another push to economic growth.

"Given our expectation of relatively well-behaved single digit inflation for some time, there was ample room for policy easing of this magnitude," said Razia Khan, head of research for Africa at Standard Chartered Bank.

Year-on-year inflation fell for the 13th straight month in December to 3.2 percent. Market participants said although the shilling had exhibited signs of weakness in the early days of this year, it was still stable.

The shilling fell to a seven-month low against the dollar on the first trading day of this year on Jan. 2, but the central bank's intervention through dollar sales and drains on liquidity, has prevented it from dropping further.

"The Committee concluded that there was a positive outlook on the economy including stability in both the product and foreign exchange markets reflected in stable inflation and the exchange rate," the MPC said.

It said the main risks to macroeconomic stability were uncertainty over the full resolution of the euro zone crisis and balance of payments pressures due to Kenya's high current account deficit.

Europe is a key trading partner for Kenya, soaking up its exports of tea, coffee and horticulture as well as supplying tourists who flock to the east African country's game reserves and white beaches. (Additional reporting by Beatrice Gachenge and Kevin Mwanza; Editing by George Obulutsa, Ron Askew)

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