Borrowers to be hit as CBK raises benchmark rate to tame shilling

Haron Sirima, Central Bank of Kenya deputy governor chaired the MPC meeting, which was brought forward by a month. [Photo:FILE/STANDARD]

Consumers are set to pay higher interests on their loans and mortgages as the Central Bank of Kenya yesterday beat analysts’ expectations to issue the most aggressive rate hike in more than two years on the country’s benchmark lending rate.

In a bid to lower pressure on the shilling, the CBK’s monetary policy committee yesterday raised the base lending rate by 150 basis points to 10 per cent, up from the 8.5 per cent that has been held since May 2013.

The MPC stated that the onset of the long rains had led to a decline in overall inflation in May following significant reduction on the prices of a number of food items.

“Overall month-on-month inflation declined from 7.08 per cent in April to 6.87 percent in May, with month-on-month food inflation declining from 13.42 per cent to 13.20 per cent over the same period,” stated Dr Haron Sirima, MPC vice chairman.

“However, the month-on-month non-food-non-fuel inflation has risen over the last three months from 3.16 per cent in March to 3.53 per cent in April and 4.15 per cent in May 2015.”

It is under this backdrop that the case for a rate hike has been justified by the country’s banking industry regulator,a move that will also see borrowers pay a premium price for their loans.

“The exchange rate of the Kenya shilling against the US dollar had remained under pressure largely reflecting the stronger US dollar in the global currency market, the widening current account deficit and sustained high demand for foreign exchange in April and May,” read the statement from the MPC explaining the decision.

Analysts who spoke to The Standard stated that while a hike in the benchmark lending rate was expected out of yesterday bi-annual meeting - brought forward by a month- the move by the MPC was unprecedented and signaled a dire need to pull Kenya’s currency out of it’s three and a half-year slump.

trade deficit

“In the weeks preceding the MPC meeting that was brought forward to  June 9, the CBK had tightened liquidity by allowing the maximum acceptable bid rates on its Term Auction Deposits to rise by 250bps above the CBR,” stated Razia Khan, head of research for Africa at Standard Chartered in London.

“Sizeable amounts of the shilling liquidity were mopped up on a daily basis, and the build-up of government deposits at the CBK effected an additional tightening. By raising the CBR by 150bps, the MPC has underscored its anti-inflation credibility. The shilling has benefited as a result,” reckoned Khan in a statement.

With a change of guard expected at the CBK later this months, it remains to be seen how far the move by the regulator will go towards saving the local currency from further depreciation.

“With Kenya’s current account deficit estimated by the IMF to have reached 10 per cent of GDP last year, and capital goods imports and a recovery in oil prices likely to keep the trade deficit wide, the June rate hike should slow, rather than prevent, further shilling depreciation in the medium term,” said Khan.