Central Bank of Kenya
Central Bank of Kenya in the capital in Nairobi in a file photo. REUTERS

Kenya's monetary policy committee decided to leave its key lending rate unchanged because non-food and fuel inflation were within its target band, its chairman, who is also the governor of the central bank, said on Monday.

The bank held its benchmark rate at 6.25 percent last week, confounding the market, which had been expecting a modest rise to fight inflation and volatility in the shilling exchange rate.

Year-on-year inflation rose for the ninth month running in July to 15.53 percent from 14.49 percent in June, driven by higher food prices and rises in other items including housing.

Njuguna Ndung'u acknowledged that the jump in inflation was hurting the economy but said policy could not be used to combat a supply side problem, amid shortages of staples like maize and higher international oil prices.

"We do not want to add to the confusion on the supply side which is really hurting the economy," Ndung'u told a news conference aimed at explaining the thinking behind the rate decision.

Growth more than doubled to 5.6 percent last year, pointing to recovery taking hold after political violence in 2008, but high prices and exchange rate volatility have dimmed the outlook for 2011, making it harder to keep growth on course for a target of a sustained 10 percent per year rate over the medium term.

A scheduled three-hour power rationing on alternate days targeting industrial sectors and demand for food for victims of famine in neighbouring Somalia and parts of Kenya could yet add more bumps in the growth outlook.

Prices of food and fuel accounted for the largest proportion of the rise in inflation during July with food inflation rising due mainly to higher dry maize and maize flour prices.

The committee said that while non-food and fuel inflation had risen to 6.5 percent in July from 5.6 percent in June, it remained within the acceptable 3-7 percent range.

The east African nation stopped publishing core inflation data in 2009, after it re-configured its inflation basket's configuration and the calculation methods used, under an International Monetary Fund-assisted exercise aimed at ensuring the statistics office uses international standards.

"What we have shown is that you can remove the volatile components and it works nicely," Ndung'u said, adding that the non-food and non-fuel category accounts for 37 percent of expenditure and 54 percent of the items surveyed in the basket.

Policymakers say the tightening cycle they embarked on in March had the effect of limiting the growth of liquidity in the economy, with broad money supply targets set at its meeting being met.

A reduction of government borrowing during the period led to private sector credit growth, mainly to the farming, manufacturing and trade sectors, indicating that economic growth might be supported this quarter, Ndung'u said.

Credit to the private sector rose to 88.5 billion shillings in the second quarter of this year from 66 billion shillings in the first quarter, despite falls in the credit to households and towards purchase of consumer goods.

Ndung'u declined to say if inflation had peaked in July, saying an assessment of incoming harvests of cereals and other produce from the country's bread basket in the Rift Valley will be key to that assessment.

He chided market participants who expressed disappointment with the bank's decision on rates, saying they were not looking at the whole picture.

"Fully anticipated policy will not have much impact... We are looking at the totality of the market and the economy. This is not a football match where you want more goals (further rate rises)," he said.

The tightening cycle and other liquidity management tools introduced in June caused yields and commercial rates to head higher and brought a funding crunch in the money markets that are being addressed through reverse repurchase agreements.