NAIROBI, Sept 3 (Reuters) - The Kenyan shilling was flat against the dollar on Monday as investors looked to Wednesday's central bank rate-setting meeting for market direction, traders said, with a big cut expected. Traders said a sharper-than-expected fall in August's inflation rate to 6.09 percent from 7.74 percent a month earlier had opened the door for a further easing of monetary policy following rate cut in July. Market players said a rate cut of between 250-450 basis points this month had already been priced into the currency market. "The (end-year) core inflation numbers are expected to now be firmly below (the targeted) nine percent, which gives the monetary authority the incentive to loosen monetary policy," said Alex Muiruri, a fixed income 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 of Kenya cut its key lending rate by a 150 basis points in July, declaring a measure of victory over inflation which peaked at 19.7 percent in November. However, that still left the bank's benchmark lending rate at 16.5 percent. At 0730 GMT, commercial banks quoted the shilling at 84.10/30 per dollar, barely changed from Friday's close of 84.10/20. Some currency traders said the shilling might firm a touch over Monday and Tuesday's trading sessions, with the central bank seen continuing to mop up liquidity through repurchase agreements and importers dollar demand expected to be slack. "Since the end of the month is now behind us, (importer) dollar demand has reduced a bit. The shilling could firm slightly on this," said a trader at one leading commercial bank. Kenya's foreign exchange reserves hit a record high of $5.12 billion last week, equivalent to 4.14 months worth of import cover, giving policymakers muscle to lower lending rates aggressively and support the economy.

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