The current inflationary pressures that are fuelled by a sustained increase in cost of oil and food commodities could lead to a rise in market interest rates, a banker has warned.

Barclays Bank country treasurer Kihara Maina says indications are that inflation will drive interest rates up in the short to medium term.

This is despite pressure to keep interest rates low to facilitate reconstruction following the January post-election violence that caused economic ruin.

Overall inflation rose to 26.6 per cent in April, from an average rate of 21.8 per cent in March.

A continued rally in prices of goods since January has seen the month on month inflation hit the highest level since 1994 when it stood at an average rate of 28.8 per cent.

Mr Kihara says costs of borrowing could also soon rise as lenders seek to cushion themselves against the rising prices of commodities.

The Safaricom Initial Public Offering (IPO), now in its tallying and share allocation stage, has obscured the inflationary undercurrents that are set to push interest rates up, according to the banker.

Interest rates on Treasury bills, which are generally considered the industry benchmark rates, have eased since closure of the application period for the Safaricom IPO on April 23, as investors re-allocate excess funds to buying Government securities.

During last week's Thursday auction, the average 91-day Treasury bills rate declined by 7.3 basis points to 7.69 per cent from 7.76 per cent in the previous week's auction.

In the same auction, the average 182-day Treasury bills rate also declined by 2.2 basis points from 8.77 per cent to 8.75 per cent.

However, the 12-weeks moving average for the 91-day Treasury bills rate increased from 7.20 per cent in the previous week to 7.26 per cent while the 182-day Treasury bill rate rose from 8.15 per cent to 8.21 per cent."Interest rates will start rising as soon as the obscuring effects of the Safaricom IPO clear and the true market liquidity situation is revealed," says Mr Kihara.

Mr Kihara who was speaking at a fund managers' briefing yesterday, added that an increase in banking products range in the future could lend relevance to the Central Bank Rate (CBR), which would then act as an industry interest rates benchmark.

Such products include bank assurance and mortgage lending by banks, in addition to other retail consumer focused products.

The CBR is set by the Central Bank's economic advisory committee, the Monetary Policy Committee, as the benchmark lending rate for banks across the inter-bank borrowing window and is meant to signal the suitable market base lending rate.

Mr Kihara also said that the shilling, currently trading at an average rate of Sh62 to the dollar, would soon weaken owing to reduced foreign currency inflows, and the rising oil import bill.

"The shilling could trade at a high of Sh63 and a low of Sh67 to the dollar in the coming six months," said Mr Kihara.