Governor Kamau Thugge announced on Tuesday that Kenya’s central bank raised interest rates a month early due to unusually high consumer prices in May.
He told a news conference that inflation will fall in August or September.
After annual inflation (KECPI=ECI) in May exceeded estimates at 8%, policymakers hiked the benchmark lending rate to 10.50% on Monday, the highest level since 2016.
“It was critical we take action to address this,” said Thugge, who succeeded Patrick Njoroge this month.
Food and fuel prices kept May inflation above the government’s 7.5% target.
After rising fuel taxes in July, Thugge expects the inflation rate to decline in August.
“Given the actions 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 move to dramatically raise rates, stating that the government collecting its bills to suppliers and improving business conditions would offset a recent surge in non-performing loans.
According to central bank predictions, agriculture will boost economic growth to almost 5% this year from 4.8% last year.
Thugge also suggested government bond yields, which have risen to nearly 14% in recent auctions, should stabilize in the financial year starting next month.
He stated better revenue collection, government expenditure reduction, and fewer domestic borrowing would drop yields.
“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 convergence between the policy rate and the yields on government debt,” he said.
