20100627
reuters

Higher interest rates in Kenya will be "a recipe for recession" as the recovery in east Africa's largest economy is still fragile and inflation is not a threat, the central bank governor said on Sunday.

Kenya's economy is expected to grow 4-5 percent this year, according to government forecasts, after a bloody post-election crisis in 2008, drought and the global crisis cut growth sharply to 2.6 percent last year, down from a peak of 7 percent in 2007.

Cheaper credit and good rains are also expected to boost the economy, while inflation accelerated to 3.9 percent in May -- still within the central bank's medium-target of 5 percent -- from 3.7 percent a month earlier, its lowest since October 2005.

The key Central Bank Rate stands at 6.75 percent.

"I don't think we can tighten. The economy is in this fragile recovery state. Growth in our country comes from investment. Higher interest rates will be a recipe for recession," Njuguna Ndung'u told Reuters in an interview.

"Right now at (inflation rate of) 3.9 percent, we're not in a threat. We do not see a threat to food supply issues."

Ndung'u, in the Swiss city of Basel to attend the annual meeting of the Bank for International Settlements, said rates in the bond market are coming down below 10 percent.

"As the economy continues to pick up that increases competition in terms of investment opportunities, growth gets stronger than last year when it was very fragile, you're going to see rates coming down aggressively," he said.