Borrowers are staring at expensive loans after the Central Bank of Kenya (CBK) raised its policy lending rate by 75 basis points to 9.50 per cent - the highest in four years and nine months - in a bid to stem rising inflation and stabilise the weakened shilling.
The Monetary Policy Committee (MPC) cited the persistent rise in prices of goods and services and the elevated global risks and their potential impact on the domestic economy, as some of the major reasons for tightening the supply of money.
“The MPC noted the sustained inflationary pressures, the elevated global risks and their potential impact on the domestic economy, and concluded that there was scope for a further tightening of the monetary policy in order to anchor inflation expectations," said MPC Chairman and CBK Governor Patrick Njoroge said in a statement after its meeting.
"In view of these developments, the MPC decided to raise the Central Bank Rate (CBR) from 8.75 per cent to 9.50 per cent."
This is the highest CBR in almost five years and comes at a time when the country is grappling with a spike in prices of goods and services as well as a weakening shilling.
The key lending rate was set at a similar point in May 2018.
The tightening of liquidity by the inflation targeting MPC is expected to have a negative effect on access to credit for individuals and companies.
The increase in CBR, however, matched the expectations of most analysts who had said they expect the policy rate to rise as the country fights off inflationary pressure brought home by a stronger dollar, rising oil prices and the economic fallout from the Russia invasion of Ukraine which has hit food supplies.
Kenya's statistics agency is on Friday expected to publish an update of inflation numbers with the politically sensitive price pressures expected to continue amid a lingering global surge in food prices.
The inflation rate, a measure of annual changes in the cost of living, hit 9.2 per cent in February from 9.0 per cent in January, the Kenya National Bureau of Statistics (KNBS) reported earlier in what is further squeezing consumers hard.
MPC said that while the economy shows strong resilience, shocks from imported inflation in the form of surging food prices could lead to a spike in consumer goods prices if the liquidity is not tightened.
It said it will closely monitor the impact of the policy measures, as well as developments in the global and domestic economy, and stands ready to take additional measures, as necessary.
"The committee will meet again in May 2023, but remains ready to re-convene earlier if necessary," said Njoroge.
The continued weakening of the local currency has set up the country for a crisis, posing an economic and political problem for President William Ruto's administration.
The prices of key food items have climbed significantly over the past couple of months, adding pressure on cash-starved households that are still reeling from the economic hit of the Covid-19 pandemic.