Kenya c.bank to focus on lowering inflation, currency stability

NAIROBI, Sept 18 (Reuters) - Kenya's central bank will focus on lowering inflation and maintaining exchange rate stability to spur growth in east Africa's biggest economy, Governor Njuguna Ndung'u said in the bank's September newsletter.

The bank said in the newsletter it will aim to keep inflation expectations within the government's 5 percent medium-term target and keep the shilling stable to help foster growth.

"Looking ahead, monetary policy will focus on anchoring inflation expectations to low levels within the target and sustaining the stability of the exchange rate," Ndung'u said.

"This would provide a stable macroeconomic environment necessary to support a stronger economic growth base and a planning horizon by private sector for higher investments."

The bank early this month cut its key lending rate by a record 350 basis points to 13 percent, largely in line with market expectations and against a background of reducing inflationary pressures and exchange rate stability.

Kenya's year-on-year inflation fell for the ninth straight month in August, and faster than expected, to 6.09 percent. Projected good rains and a stable supply of food is expected to further ease the country's inflation.

Ndung'u said the bank will also strive to maintain adequate stocks of foreign exchange reserves that provide a buffer for shocks and confidence in the market.

The official usable foreign exchange reserves rose last week to $5.193 billion from $5.147 billion the previous week.

Kenya and east Africa's other main economies of Tanzania and Uganda took a hit from soaring inflation and weakening currencies in 2011, prompting policymakers to adopt a tight monetary stance.

Kenya ramped up the central bank rate by 11 percentage points in the last quarter of 2011 to 18 percent after inflation surged towards 20 percent, and held it there for seven consecutive months, before cutting it to 16.5 percent in July.

The tightening has yielded fruit this year with inflation falling and the Kenyan shilling regaining stability.

But high borrowing costs have dealt a blow to growth, which slowed to 3.5 per cent in the first quarter of 2012 compared with 5.1 percent for the same period last year. That was the slowest first-quarter growth figure for Kenya since 2008, Kenya National Bureau of Statistics data showed. (Reporting by James Macharia; Editing by Catherine Evans)