CBK's Thugge sees light at end of tunnel amid loans shocker

Central Bank of Kenya Governor Kamau Thugge when he appeared before the Senate Finance and Budget Committee at Parliament on December 4, 2023. [Boniface Okendo, Standard]

The Central Bank of Kenya (CBK) yesterday maintained its recent developments regarding the stability of the shilling and its impact on the cost of living, suggesting an end to the economic crisis may be coming into view.

CBK Governor Kamau Thugge issued the bullish projection as the Kenya Kwanza administration made the latest radical attempt to rein in the runaway cost of living crisis by raising the cost of borrowing by a record high last seen 11 years ago. 

In what will put to fresh test the Ruto government’s plan to stabilise the shilling and reduce economic pain for Kenyans, the CBK yesterday raised its benchmark lending rate by 50 basis points to 13.00 per cent from the previous 12.50 per cent.

“The MPC, therefore, decided to raise the Central Bank Rate (CBR) from 12.50 per cent to 13.00 per cent,” said Dr Thugge.

The rate - the highest in a decade and near levels last witnessed on October 5, 2012 during the Kibaki era, is in a bid to stabilise the flagging shilling and rein in the runaway cost of living, according to Dr Thugge, who is also the chairman of the apex bank’s decision-making organ, the Monetary Policy Committee (MPC).

The tightening of liquidity is however expected to hurt access to credit for individuals and companies, with Kenyan borrowers set to feel the financial pain of the increased cost of loans. 

This could translate into banks tightening their lending standards further and cutting their lending to ordinary Kenyans as acknowledged by Thugge.

“Growth in commercial bank lending to the private sector stood at 13.9 per cent in December 2023 compared to 13.2 per cent in November,” said Dr Thugge. At the same time, higher rates have increased borrowing costs.

The CBK boss, however, defended the hike, saying it is the best weapon to cool off the shilling and resurgent in the prevailing circumstances. “The MPC noted that overall inflation has remained sticky in the upper bound of the target range. The Committee further observed that all key components of inflation-fuel, food, and NFNF (non-food-non-fuel) had increased in January,” said Dr Thugge. 

“In addition, the MPC noted the continued, albeit reduced, pressures on the exchange rate and therefore concluded that further action was needed to stabilise prices.”

He argued the proposed action will ensure that inflationary expectations remain anchored within range while setting inflation on a firm downward path towards the 5.0 per cent mid-point of the target range, as well as addressing pressures on the exchange rate. 

Kenya’s inflation — a measure of annual changes in the cost of living— rose to 6.9 per cent last month from 6.6 per cent a month earlier (December) due to an increase in commodity prices, the Kenya National Bureau of Statistics reported.

This is however within the 2.5 and 7.5 per cent target band by the CBK.

On Tuesday, the Shilling steadied around Sh160.35 to the dollar according to the CBK official printed mean rate.

  Banks have steeply increased the cost of loans with interest rates beyond 20 per cent, leaving their customers with a massive debt servicing burden.

This comes at a time when the high cost of living is already squeezing Kenyans hard.

The sharp rise in interest rates also threatens to choke economic growth as it will lift borrowing costs and encourage cutting costs or saving over spending, investing, and hiring, experts warned. 

If lending dries up, that could weigh down on the value of stocks, real estate and other assets besides crimping overall demand—a recipe for a painful recession.  

Thugge however said he expects the battered economy to post above-trend growth in both the first quarter and into the first half of 2024.

“Leading indicators of economic activity point to continued strong performance in the fourth quarter of 2023. As a result, real GDP growth is estimated at 5.6 per cent in 2023 from 4.8 per cent in 2022,” said Thugge.

“The economy is expected to remain strong in 2024, supported by the resilient services sector, the improved performance in agriculture, implementation of measures to boost economic activity in priority sectors by the Government, and the improved global growth outlook which is expected to benefit exports.”

Thugge said the CEOs and the Market Perceptions Surveys, which were conducted ahead of the MPC meeting, revealed improved optimism about business activity and economic growth prospects for the next 12 months. 

“Respondents attributed the optimism to improved performance of agriculture, casing global inflation, a resilient private sector, and focus by the Government on key sectors including agriculture, MSMEs, health, housing, and digital economy,” he said. 

“Nonetheless, respondents expressed concerns about weakened consumer demand, weakening of the Kenya shilling, and high-interest rates.”

The International Monetary Fund (IMF) had asked the CBK to consider tightening the base rate further to limit spillover effects. “On monetary policy, the authorities agree on being proactive, as also demonstrated in their decisive 200-basis-point December policy rate hike, and maintaining a tightening bias given risks to the inflation outlook,” said the IMF.

“Staff also finds evidence of exchange rate depreciation having some hat larger passthrough than appreciation.”

Kenyans are forking out more to purchase basic commodities as the shilling continues to weaken due to external pressures, posing a fresh political and economic headache for the Kenya Kwanza administration.

Restless Kenyans want the Ruto administration to put measures in place to shield consumers and companies from the full impact of surging energy and food costs.