Traders said the market was uncertain which way the rate decision would go after inflation dropped to a slower-than-expected 12.22 percent in May from 13.06 percent earlier, but last week's currency volatility after hitting an intra-day low of 87.80 per dollar had muddied the prospects for a rate cut.

At 0730 GMT, commercial banks posted the shilling at 85.80/86.00 to the dollar, from Thursday's close of 86.00/20. Markets were closed on Friday for a national holiday.

"We have some flows from NGOs (non governmental organisations) but we also have oil companies in the market," said Dickson Magecha, a trader at Standard Chartered.

"The market was geared for a cut but now its 50-50 because of fear of currency risk."

The central bank has held its key rate at 18 percent since December, where it drastically raised it to after it faced heavy criticism for its slow reaction to the weakening of the shilling.

The local currency lost a quarter of its value to 107 per dollar in October, while inflation rose to nearly 20 percent.

"Interest rates is a matter of priority. They (MPC) should start dropping the rates," said Raphael Owino, senior trader at Commercial Bank of Africa, referring to the drop in prices in the real economy.

Owino said banks were readjusting their shilling outlook following the regulator's heavy presence in the market on Thursday.

The bank has stepped up its activity in the market, absorbing excess shilling liquidity and offloading unspecified amounts of dollars to commercial banks.

The bank's foreign exchange reserves fell to $4.425 billion this week from $4.549 billion last week.

Traders expect the shilling to trader between 85.50-86.80 to the dollar during the session.