Kuwait’s annual inflation eased to 5.2 percent in January from a nearly two-year high. Price pressure rose in Kuwait last year, led by food costs, pushing inflation to six percent in December, the highest rate in the Gulf.

“We expect inflation in Kuwait in 2011 to reach five to six percent,” Central Bank Governor Sheikh Salem Abdul-Aziz Al-Sabah said.

High global food prices, which helped trigger popular uprisings in several Arab countries, is one of the factors seen lifting inflation in the Gulf, which imports majority of its food, this year.

“There are some inflationary pressures, but these are largely externally driven. So it’s not clear that interest rate adjustments would be the best way to tackle this,” said Paul Gamble, head of research at Saudi bank Jadwa Investment.

“I wouldn’t see any need to start raising interest rates dramatically until we see stronger growth in domestic credit creation.”

Kuwait’s key discount rate currently stands at 2.5 percent, after being cut from three percent on Feb 7, 2010.

“Inflation is at the upper end of our forecast. Obviously a lot depends on what happens globally with commodities prices,” Gamble said.

Sheikh Salem also said the OPEC member’s 2011 nominal gross domestic product was expected to be 8.3 percent, after an expected 17.3 percent in 2010, based on IMF forecasts.

In the first half of 2010, Kuwait’s economy recovered at a slower pace than expected after shrinking 21.2 percent in nominal terms in 2009 due to weak oil prices, data showed last year. The nominal GDP of Kuwait dropped to 31.5 billion dinars ($113.4 billion) in 2009, from 40.0 billion in the previous year.

The global downturn hit Kuwait harder than other Gulf states in 2009 as its economy is heavily reliant on the hydrocarbon sector.

“The situation of liquidity is good. The percentage rise in profits for local lenders in 2010 was 62.6 percent despite provisions that were booked,” Sheikh Salem said.

“We hope to see continued growth in profits in 2011.”

He also said he would expect a decline in non-performing loans in the first half of 2011, and that the bank would not change its loan provisioning policy

“The percentage of non-performing loans fell to 7.4 percent in 2010, compared to 10.2 percent in 2009,” he added.

Sheikh Salem said interest rates were “very suitable,” and that Kuwait would have no need to drop the peg, sticking to its currency basket.

Kuwait is the only Gulf oil exporter tracking a currency basket, after ditching the dollar peg in 2007.