Namibia's central bank raised its repo rate by 25 basis points to 5.75 percent, saying inflation has shown an upward trend for the past five months and is now expected to average 6 percent this year, up from its April forecast of below 6 percent.
The Bank of Namibia, which last changed its rate in August 2012 when it cut the rate, also said the domestic economy is forecast to improve in the remainder of the year, supported by construction activities and strong growth in demand.
Lower commodity prices remain a concern as it may affect mineral production.
Namibia's inflation rate rose to 6.1 percent in May, the sixth consecutive month of rising prices, from 5.87 percent in April, mainly due to higher food and transport prices, the bank said.
The annual growth in domestic private sector credit rose further to 15.8 percent in April from 14.3 percent in December, with household credit largely reflecting strong growth in installment credit and overdraft loans.
"The rapid growth in imports of vehicles, partly financed by installment credit remains a concern," the bank said, adding "unproductive imports have put pressure on international reserves of the country and requires monitoring."
The total number of vehicles sold in the first four months of the year rose by more than 50 percent from the same 2013 period, with the value of these imported vehicles at N$ 2.2 billion, "a significant amount in relation to the total import bill of goods of N$ 15.9 billion," the bank said.
The central bank said it had recommended targeted intervention to authorities but acknowledged that this could take time to implement due to the required change in legislation.
Namibia had a trade deficit of N$ 4.340 billion in the fourth quarter of 2013 and a current account deficit of 6.2 percent of Gross Domestic Product in the 2013, down from 7.5 percent in 2012.
Namibia's GDP in the first quarter of this year expanded by 1.6 percent on a year-on-year basis, down from 4.9 percent in the previous quarter.
In April the central bank maintained its forecast for the economy to expand by 5.3 percent this year, up from 2013's 4.3 percent.
With its exchange rate fixed to South Africa's rand, the Namibian dollar largely reflects changes in the rand.
Last year the Namibian dollar depreciated 19 percent against the U.S. dollar, along with the rand, and it continued to decline through January. Between February and late May, the N$ rebounded but since May 24 it has dropped, trading at 10.75 to the US$ today, down from 10.47 end-2013, or 2.6 percent this year.