Kenya's central bank cut its benchmark lending rate on Thursday for the first time since July, in a surprise move seen as a bid to curb rising Treasury bill and bond yields.
All 10 analysts polled by Reuters had expected it to keep rates on hold.
The central bank said there were no near-term upside risks to the inflation outlook, commercial banks still had room to cut their own lending rates further, and the government's borrowing programme was unlikely to push market rates higher.
"In order to provide the impetus to enhance further growth, the MPC was of the view that private sector investment should be supported with adequate and affordable credit," the MPC said in a statement.
The Central Bank of Kenya's decision came a day after it rejected most bids in an auction for 10-year Treasury bonds, another move traders thought was designed to keep a lid on rising yields.
"It's a bit of a surprise," said Chris Muiga, senior trader at Kenya Commercial Bank.
"I guess they are sending a message that they want rates lower, or at least they don't want rates to go up. Remember what happened to the 10-year bond yesterday?"
The yield on 10-year Treasury bonds rose to 9.863 percent at auction on Wednesday, up from 8.646 percent at the previous auction in October.
Yields on 91-day, 182-day and 364-day Treasury bills have risen at every auction since December 2, when the yield on 91-day bills fell marginally to 2.239 percent. The yield rose to 2.519 percent at auction on Thursday.
"They did a good job last year (of supporting growth). They must keep interest rates in check. It is a clear signal as to where they want to see rates go," said Saloum Jobarteh, head of financial markets at Standard Chartered Bank.
"I am in full support of what they have done, rising yields would have set the economy back."
Kenya's economy grew by 6.1 percent in the third quarter of 2010 from a year earlier and the inflation rate crept up to 4.5 percent in December on the back of food price rises. A looming drought threatens to push prices even higher.
However, the central bank said the government had put in place adequate measures to resolve food distribution challenges, and any inflationary risk from rising oil prices should be mitigated by economic growth.
The bank said the growth momentum seen in the third quarter could be sustained. However, it was below the 10 percent annual expansion envisioned in the government's plan to become a middle income nation by 2030.
The central bank said while commercial banks had been bringing down their own lending rates, following the easing cycle the central bank started in December 2008, "there was adequate scope to lower the rates further".
However, some traders said the central bank's move was unlikely to put much downward pressure on yields.
"I think the central bank is trying to contain the upward spike at the short and long end of the curve. I doubt banks will respond and we won't see any rally in government bonds," said Duncan Kinuthia, head of fixed income at Bank of Africa.