By Duncan Miriri
NAIROBI (Reuters) -Kenya’s central bank was forced to raise interest rates a month before its scheduled meeting after consumer prices rose unexpectedly in May, governor Kamau Thugge said on Tuesday.
Inflation is now likely to start falling in August or September, he told a news conference.
Policymakers on Monday raised the benchmark lending rate by a percentage point to 10.50%, the highest level since 2016, after annual inflation in May rose to 8%, defying expectations of a decline.
“It was critical we take action to address this,” said Thugge, who took over this month following the end of the tenure of predecessor Patrick Njoroge.
May inflation was driven higher by food and fuel prices, keeping the rate outside the government’s preferred upper limit of 7.5%.
The inflation rate is likely to start falling in August after a bump in July that will be driven by higher taxes on fuel, Thugge said.
“Given the actions that we are now taking, we do expect that by August earliest and latest by September, the overall rate of inflation to come to below the upper range of 7.5%,” he said.
Thugge defended the decision to raise rates sharply, saying that a recent increase in non-performing loans would be addressed by other factors like the government settling its debts to suppliers, and an improvement in business conditions.
Economic growth is expected to rise to more than 5% this year, from 4.8% last year, mainly due to a recovery in the key agriculture sector, according to central bank forecasts.
Thugge also said yields on government securities, which have surged to more than 14% in recent auctions, are expected to stabilize in the course of the financial year starting next month, he said.
Projected higher revenue collection, government expenditure cuts and lower planned borrowing from the domestic market will all put downward pressure on yields, he said.
“We expect yields actually to stabilise and perhaps even come down during the course of the year and then we can see some kind of a convergence between the policy rate and the yields on government debt,” he said.
(Reporting by Duncan Miriri; Editing by Christina Fincher and Conor Humphries)
