NAIROBI, July 9 (Reuters) - Kenya's central bank held its main lending rate at 8.5 percent on Tuesday, saying it needed to allow previous rate cuts to filter through, but warned that instability in Egypt was a risk to the economy.
A Reuters poll of nine analysts had predicted the bank would leave rates on hold, with just one respondent forecasting a 50 basis point cut.
Inflation remained within the government's preferred band of 3-7 percent in the year to June, which combined with a stable exchange rate, and growing confidence in the economy, prompted the central bank to take a neutral view, it said.
But Kenya's gaping current account deficit and fresh political instability in the Middle East and north Africa (MENA) pose risks to the economy, the Monetary Policy Committee said.
'Previous experience had shown that disturbances in MENA region could affect the price of oil and tea exports. This could have balance of payments and inflation implications,' the committee said in a statement.
Egypt, whose president was ousted last week, is the leading buyer of Kenyan tea, a top foreign exchange earner.
Razia Khan, head of Africa research for Standard Chartered in London, said strong credit growth would support the economy and help maintain rates where they are for the rest of the year.
'With the stable shilling helping to offset potential inflationary pressure, we see little need for an imminent change in interest rates, in either direction,' she said.
The committee gave a benign assessment of the foreign exchange rate, citing healthy hard currency reserves at 0.22 months above the statutory requirement of four months, and its aggressive liquidity management through the open market.
The shilling has weakened 1.2 percent against the dollar since July 3, in line with other risky assets, on expectations that the U.S. Federal Reserve will start to unwind its stimulus.
A sustained drop in yields on Kenyan government bonds could send the shilling towards the 87.70 level in the weeks ahead, ushering 92.00 as the next target, charts showed.
(Reporting by Duncan Miriri and Kevin Mwanza; Editing by James Macharia and Catherine Evans) Keywords: KENYA RATES/
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