High interest rates have recently supported the shilling, ranked as one of Africa's most liquid currencies, and the currency was expected to come under pressure if the bank started easing its monetary policy.

Neighbouring Uganda's currency has fallen more than 8 percent in two sessions after its central bank sliced a percentage point off record high interest rates, even though headline inflation was still running above 25 percent.

Traders said the market was cautious ahead of a meeting to set the key benchmark rate due to uncertainty as to whether the bank would embark on an easing cycle after hiking its key rate to 18 percent in the last quarter of 2011 to stem high inflation and a volatile exchange rate.

At 1300 GMT, commercial banks posted the local currency at 82.95/83.15 per dollar - after touching an intra-day high of 82.60/80 after the Monetary Policy Committee (MPC) announced its decision - and firmer than Monday's close of 83.20/40.

"Some guys who expected a cut decided to load up on dollars ahead of the rate decision... that's the reason why the shilling appreciated as some guys sold dollars," said Kennedy Butiko, deputy head of Treasury at Bank of Africa.

"We should see it a tad firmer because the central bank has been buying dollars from the market to keep it stable. The cost of the shilling is also high at the moment and guys prefer to borrow dollars more."

Last week traders said they had seen the central bank looking to buy dollars around the 82-82.50 level.

All 12 analysts surveyed by Reuters agreed the next move in rates would be down, but half said it was too early for the bank to cut as dry weather and higher global oil prices could put pressure on food and fuel prices in Kenya again.

The local currency sank to a record low of 107 to the dollar on Oct. 11 in the face of high inflation, caused by a widening balance of trade gap due to high global oil prices.

At the Nairobi Securities Exchange, the benchmark NSE-20 Share Index extended its gains to an 11th straight day, up 0.6 percent to 3,362.59 points buoyed by rosy company earnings.

Traders said the decision to hold the rate by the central bank would attract foreign investors to the bourse due to a stable shilling, but high yields on government paper would keep attracting investors and keep them away from the stock market.

Co-operative Bank led the gains, up nearly 8 percent to 12.95 shillings aided by investors betting on impressive full-year results due this month in line with solid performance by banks.

"Co-op bank shares might not be as attractive as the others in its sector on a price-earning basis, but it is expected to release good results," said Renaldo D'souza, an analyst at Genghis Capital.

Banking stocks dominated the market with the top mover being collectively accounting for 71% of total turnover, Old Mutual Securities said in a note.

In the debt market, corporate and government bonds worth 3.0 billion shillings ($36 million) were traded, up from 1.8 billion shillings on Monday.