The shilling closed Monday's session at 84.20/40 per dollar, weaker than Friday's close of 84.10/20.

All nine analysts polled by Reuters expect the Central Bank of Kenya to cut its policy rate after year-on-year inflation fell sharply in August to 6.09 percent, the lowest since January 2011.

"The (end-year) core inflation numbers are expected to now be firmly below (the targeted) 9 percent, which gives the monetary authority the incentive to loosen monetary policy," said Alex Muiruri, a trader at Africa Alliance Investment Bank.

However, a more-aggressive-than-expected loosening, they said, might trigger a knee-jerk weakening of the currency if speculators bet on importers using cheaper credit to ramp up their demand for dollars and commercial banks extending long dollar positions.

"We expect the shilling to weaken immediately (after) they cut, but that won't last because the shilling is well supported. The central bank might come in if the shilling falls drastically," said Robert Gatobu, a trader at Bank of Africa.

The central bank continued to mop up liquidity through repurchase agreements (repos), taking out 1.15 billion shillings ($13.7 million) after it offered 3 billion shillings on Monday.

At the Nairobi Securities Exchange, the NSE-20 Share Index inched lower for the third session, down 0.3 percent to 3,855.14 points, dragged down by Mumias Sugar.

The country's leading sugar miller, which traded the highest volume among the losers, dropped by 2.7 percent to 6.20 shillings as disappointed retail investors dumped the stock after it reported a 33 percent fall in pretax profits. 

"Investors are not happy with the full year results. The results did not meet the expectations of the investors," said Ronald Lugalia, an analyst at Africa Investment Bank.

Trading in government and corporate bonds nearly doubled to 4.30 billion shillings on Monday from 2.94 billion shillings the previous session.