More pain for borrowers as key lending rate hits seven-year high

The Central Bank of Kenya (CBK). [File, Standard] It will now cost you more to service your loan or access a new one. This is after the Central Bank of Kenya (CBK) raised its policy lending rate by 100 basis points to 10.50 per cent - the highest in seven years - in a bid to stem rising inflation and stabilise the weakened shilling. The Monetary Policy Committee (MPC) which held its first meeting on Monday, June 26, under the chairmanship of the newly appointed CBK governor Kamau Thugge, 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 tightening of liquidity is however expected to have a negative effect on access to credit for individuals and companies with borrowers set to feel the financial pain of increased cost of loans. Rising borrowing costs also typically dampen investment, hiring and consumption. "The MPC noted the sustained inflationary pressures, the increased risks to inflation outlook, the elevated global risks and their potential impact on the domestic economy. The MPC thus 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 Kamau Thugge in a statement after its meeting. "The Committee therefore decided to raise the Central Bank Rate (CBR) from 9.50 per cent to 10.50 per cent." The latest raise is the highest CBR in seven 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 July 2016. The raise is the biggest tightening in a single MPC meeting since July 2015 or in the last eight years and is set to raise jitters among borrowers amid the rise in bad loans. The CBK at the time raised the rate by 1.50 basis points. The Thugge-led CBK however reckons the policy rate rise will help the country fight 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. 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 Shilling traded at Sh140.4412 on Monday -hitting a record low new low against the dollar, setting the stage for costly imported goods such as cars, electronics, farm inputs and second-hand clothes as well as that of electricity amid a shortage of the US currency. 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. Kenya's statistics agency is later this week 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 and a hike in various levies that are expected to impact on consumer goods. The inflation rate, a measure of annual changes in the cost of living, hit 8 per cent in May from 7.9 per cent in April, the Kenya National Bureau of Statistics (KNBS) reported earlier in what is further squeezing consumers hard. The Thugge chaired-MPC 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 weakening of the shilling has triggered fears of a fresh round of inflationary pressure, which has become a political headache for the government.

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