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Kenya Inflation May Accelerate on Food, Oil, Central Bank Says

March 28 (Bloomberg) -- Kenyan inflation may accelerate further, after hitting a 16-month peak last month, driven by rising food costs and higher global oil prices, central bank Governor Njuguna Ndung’u said.

The bank’s Monetary Policy Committee on March 22 unexpectedly increased the key lending rate by a quarter of a percentage point to 6 percent, reversing a cut two months earlier, to try to curb inflation. The rate of price growth climbed for the fourth straight month in February to 6.5 percent, the highest since October 2009 and above the government’s target of 5 percent. The Nairobi-based Kenya National Bureau of Statistics is scheduled to publish the latest inflation data on March 31.

"It was clear from internal analysis that the dominant picture of the inflationary pressure was being initiated on the supply side through food shortfalls and high oil prices," Ndung’u said in an e-mailed statement today explaining the MPC’s deliberations last week. "The temporary supply shocks were starting to appear as persistent and hence require remedial action."

The interval between the onset of rains and the harvesting of crops will probably give rise to food price increases "for at least a couple months" and may result in higher consumer inflation, Ndung’u said. Much of Kenya, the world’s largest black-tea exporter, will probably receive below normal precipitation during the March-to-May long rainy season, crimping agricultural production, the Kenya Meteorological Department said on March 8.

Middle-East Unrest

Other factors that have brought greater pressure to bear on Kenya’s inflation rate include political unrest in the Middle East and North Africa, which has increased the cost of oil and other imports, Ndung’u said.

Food and non-alcoholic drinks comprise 36.04 percent of the consumer-price measure, while transport, which includes components such as petrol and diesel, accounts for 8.66 percent.

Kenya also raised the benchmark rate to help stabilize the shilling exchange rate, Ndung’u said. The Kenyan currency weakened as much as 6.3 percent against the dollar this year, hitting a 17-year low of 86.15 per dollar on March 14, on higher dollar demand from oil importers as global crude prices surge. The shilling was trading at 84.26 per dollar as of 9:47 a.m. in Nairobi, compared with 84.40 at the close on March 25.

Prior to last week’s increase, the central bank had reduced the benchmark rate eight times since December 2008 to persuade commercial lenders to provide cheaper loans and spur economic growth. The reductions buttressed a growth rate expected to swell to 5.7 percent this year, from 5.2 percent in 2010 and 2.6 percent the year-before, according to government estimates released on March 23 in a three-year budget plan.

Japan’s earthquake and tsunami this month may have implications for Kenya’s economy because the East African nation receives development assistance from the world’s third-largest economy, Ndung’u said.

To contact the reporter on this story: Sarah McGregor in Nairobi at  smcgregor5@bloomberg.net.

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net.

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