No Need to Play God on Inflation, Kenyan Central Banker Says

(Bloomberg) -- There's no point speculating whether rains expected this month will begin on time to help tame inflation that's accelerated to five-year highs on spiraling food prices, Central Bank of Kenya Governor Patrick Njoroge said.

“Nobody knows if the long rains will come in time, and be adequate,” he said Tuesday in an interview in London. “Last time any of us played God, we failed.”

The inflation rate in East Africa's biggest economy jumped to 9 percent last month, above the government's 7.5 percent target ceiling, after food prices, which account for about a third of the index, increased by 16.5 percent from a year ago. Without food costs, price growth would have been below 5 percent, he said.

Despite the biting drought that's devastating harvests and pastures in the agriculture-reliant nation, the central bank is retaining its 6 percent gross domestic product expansion forecast, Njoroge said, adding that policy makers still have measures such as fiscal stimulus and drought payments to buoy the $69.2 billion economy.

“In East Africa, we have done a remarkable job in terms of managing the macro framework,” he said. “It gives assurance to investors, both domestic and foreign, and it gives room to maneuver. Last year was a year of shocks and this year will continue to be a year of shocks, so a strong macroeconomic framework allows you to have room for maneuver.”

Conclusive Evidence

Other than drought, Kenyans will be going to the polls on Aug. 8. Traditionally, investors and businesses have scaled back activity in the run-up to elections in the country that saw more than 1,000 people killed in violence following a disputed ballot in 2007. President Uhuru Kenyatta will be running for re-election and is expected to face considerable competition from an opposition coalition that's yet to name a candidate.

Whoever wins is unlikely to make any changes to Kenya's economic policies, Njoroge said, encouraging investors to make their bets now. “There is no point in waiting, your horizon can begin today,” he said. “I don't see any sense in the quarter-on-quarter slowdown story of wait and see attitude.”

Kenya's third-quarter economic growth decelerated to 5.7 percent from 6 percent a year earlier and 6.2 percent in the previous three months, according to the statistics agency. It's still too early to tell the effect a cap on commercial interest rates instituted in September has had on the economy, Njoroge said.

Under the new regulation, banks can only price loans at 4 percentage points above the prevailing benchmark rate. Private-sector credit growth declined to 4.3 percent in December, from 18 percent a year earlier, according to central bank statistics.

“We need indisputable data to show us what has happened,” he said. “Are we sitting on our hands? The answer is no. We are not waiting. We are obviously looking. I can't tell you when we will have conclusive evidence.”

Balanced inflows and outflows in the foreign-exchange market are expected to continue and the central bank will only intervene to minimize volatility, Njoroge said. The shilling has been fairly steady this year against the dollar, after weakening to a 15-month low in January. The currency was barely changed at 102.45 by 1:00 p.m.

“We're fully wedded to a flexible exchange-rate regime,” he said.

To contact the reporter on this story: Selcuk Gokoluk in London at sgokoluk@bloomberg.net.

To contact the editors responsible for this story: Paul Richardson at pmrichardson@bloomberg.net, Helen Nyambura-Mwaura, Dulue Mbachu