The Central Bank of Kenya (CBK), which cut rates by 700 basis points in 2012 starting in July, said inflation had stabilized within the government's 5 percent target range, the exchange rate was stable and the peaceful election should further enhance confidence and optimism about 2013.
Kenya's inflation rose by 0.7 percent in the month to February, pushed up by higher prices of food and non-alcoholic beverages, to an annual rate of 4.45 percent from January's 3.67 percent.
Inflation that excludes food and fuel, and thus measures the impact of monetary policy, declined from to 4.46 percent from 4.51 percent, the CBK said.
"The predicted favourable weather conditions coupled with non-inflationary credit growth are expected to offset the impact of rising international oil prices, and hence support a low and stable short-term outlook for inflation," the bank said.
Kenya's Gross Domestic Product grew by 2.2 percent in the third quarter from the second for annual growth of 4.7 percent, up from 3.3 percent in the second quarter.
Kenya's economy is bouncing back from the central bank's aggressive rate hike campaign from 2011 to mid-2012 to combat inflation. Private sector credit growth maintained its upward trend with annual growth in private sector credit up by 11.95 percent in January from December's rate of 10.42 percent.
The central bank's market perceptions survey from last month showed that the private sector expects inflation and the exchange rate to remain stable in the rest of this year and "sustained optimism for a strong growth recovery in 2013 on account of the prevailing macroeconomic stability and enhanced confidence in the economy following a peaceful election," the CBK said.
Despite the positive developments, the central bank said the risks to the outlook stem from the renewed upward drift in international oil prices and a weak outlook for the global economy with the expectation of a more pronounced recession in the euro zone and a slow recovery in the United States.
"This outlook, coupled with the persistent balance of payments pressure due to the high current account deficit remain a threat to the general stability of prices," the bank said.