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June 6 (Bloomberg) -- Kenya’s inflation rate, which jumped to a 25-month high in May, is expected to rise further this year as dry weather curbs agricultural production, central bank Governor Njuguna Ndung’u said.
“Threats from potential food shortages were likely to impact negatively on the balance of payments position and inflation later in the year,” Ndung’u, said in an e-mailed statement today from Nairobi, the capital. Price pressures are unlikely to slow the economy’s expansion, with growth projected to “remain strong” this year, he said.
Kenya’s central bank on May 31 raised its benchmark lending rate for the second time this year to 6.25 percent and lifted the minimum reserve requirement for banks, changing its focus to taming inflation from spurring economic growth. The increases follow eight reductions in the key lending rate between December 2008 and January 2011.
Higher food and fuel costs pushed inflation in East Africa’s biggest economy to 13 percent in May, almost triple the 5 percent target. Rising price pressures reinforced expectations of increased borrowing costs. Kenya’s 91-day Treasury bill yield climbed to 8.798 percent on June 2, a nine-year high, on speculation that inflation may erode returns, Kennedy Butiko, deputy head of treasury at Bank of Africa, said on June 3.
Kenya will lift expenditure on infrastructure by 35 percent to 221 billion shillings ($2.54 billion) in 2011-12 from a year earlier, Finance Minister Uhuru Kenyatta said on June 2. Spending in the budget for the fiscal year through June 2012 will grow 16 percent to 1.16 trillion shillings from a year earlier, providing room for government debt yields to increase further.
The International Monetary Fund last month cut its 2011 growth forecast for Kenya, citing the impact on agriculture from poor rainfall, to between 5 percent and 5.4 percent, from an earlier projection of 5.7 percent. The World Bank has reduced its forecast to 4.8 percent from 5.3 percent.
Kenya’s economy grew 5.6 percent last year.
--Editors: Paul Richardson, Philip Sanders.
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