NAIROBI (Reuters) – Kenya’s economy is likely to grow 5 percent in 2012 while its monetary policy will help cut inflation to below 10 percent and eventually pave the way for interest rate cuts, the International Monetary Fund said on Monday.
East Africa’s biggest economy has forecast growth of 5 percent or more this year as long as rains vital to the key farming sector do not fail. Kenya estimates its economy expanded 4.5 percent last year.
“We believe growth will be around 5 percent. There are a number of global factors that will make it hard to attain 6 percent,” Domenico Fanizza, head of an IMF mission visiting the country, told a news conference.
The IMF had previously said Kenya had the potential to grow at a rate of more than 6 percent over the long term.
Kenya’s inflation rate came to 16.69 percent in February, the lowest since last August and down from last year’s peak of 19.72 percent hit in November.
“We believe that (given) the current monetary stance, the inflation target of single digits in the second half of 2012 is within reach,” Fanizza said.
The Central Bank of Kenya was widely criticised for reacting late when inflation surged into double digits in 2011 and the shilling slumped to a record low of 107 against the dollar.
In response to the rise in inflation and sliding currency, the central bank ramped up its key lending rate from 6.25 percent at the start of September to 18 percent by December 1.
The aggressive monetary tightening led commercial banks to drive up lending rates to about 25 percent from 15 percent in two months, sparking widespread discontent and culminating in some lawmakers proposing a law to cap interest rates.
Fanizza said setting tight monetary policy, rather than capping lending rates by law, would eventually lead to lower rates.
“Continued fiscal consolidation and tight monetary policy will bring inflation back to single digits, keep domestic demand under control and reduce the current account deficit, laying down the conditions that would allow for an eventual decline in interest rates,” Fanizza said.
“It (central bank) will not yield to pressures to cap commercial interest rates, as this would undermine recent successes in expanding access to credit and efforts to fight inflation and stabilise the exchange rate,” he said in reference to what the IMF and the government had agreed regarding the proposed law to cap rates.
The central bank held its key rate steady at 18 percent at its January, February and March meetings to consolidate recent gains, as well as after worrying signs from its neighbour Uganda of the risks of easing policy before inflation slows markedly.
Kenya’s shilling firmed to a more than one-year high against the dollar on Monday to close at 82.15/35, driven by tight liquidity encouraged by high interbank rates, with demand high for Kenyan bonds.
“The CBK will remain fully committed to a floating exchange rate regime for the shilling,” Fanizza said.