CBK signals expensive loans, hikes lending rate to a 19-month high

Governor Central bank Of Kenya Dr.Patrick Njoroge speaking during the launch of inter-agency guidelines on cooperation and collaboration in investigation and prosecution of Terrorism and financing. [Wilberforce Okwiri, Standard]

Borrowers are staring at expensive loans after the Central Bank of Kenya (CBK) increased its benchmark lending rate by 75 basis points to 8.25 per cent.

The Monetary Policy Committee (MPC) – the highest decision-making organ of CBK – cited a 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.

This is the highest Central Bank Rate (CBR) since January 2020 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 increase in CBR also coincides with President William Ruto's move to actualise his promise of cheap credit to his support base which includes jua kali artisans, boda boda operators and mama mboga popularly known as the hustlers.

Dr Ruto has anchored his agenda for the next five years on making credit affordable, especially to small traders who have in the past found themselves paying more for loans.

"Affordable credit makes a huge difference in the rate of business growth," said Ruto in a speech at the opening of the 13th Parliament yesterday.

However, with CBK combating inflation, the President's plans for cheap credit might be delayed as the apex bank tightens money supply by raising the rate at which it lends to banks.

The tightening of liquidity is expected to have a negative effect on access to credit for individuals and companies.

The increase in CBR to 8.25 per cent 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 rising oil prices and the economic fallout from the Russia invasion of Ukraine which has hit food supplies.

MPC said that while the economy shows strong resilience, shocks from food shortages, a weak shilling, and imported inflation in the form of surging food prices could lead to a spike in consumer goods prices if the liquidity is not tightened.

The overall inflation rate stood at 8.5 per cent in August, the highest since June 2017 and beyond the CBK's target of between 2.5 and 7.5 per cent.

The high inflation has mostly been due to a rise in fuel and food prices, partly due to the war in Ukraine and the lingering effects of Covid-19.

Inflation stood at 8.3 per cent in July. Consumers have been grappling with a sharp increase in prices of essential items like cooking oil, food, fuel and soap, squeezing household budgets and demand for goods and services.

The Kenya National Bureau of Statistics (KNBS) is expected to publish updated data today for this month.

The measures taken by authorities around the world in response to these developments – for example raising interest rates – have only made things worse for countries in emerging and frontier markets like Kenya.

And there will be no reprieve, according to CBK.

"Overall inflation is expected to remain elevated in the near term, due in part to the scaling down of the government price support measures, resulting in increases in fuel and electricity prices, the impact of tax measures in the financial year 2022-23 budget, and global inflationary pressures," said CBK in a press statement.

Most of the inflation being felt in the country is imported with the dollar strengthening against major currencies including the shilling. The shilling traded at Sh120.6971 on Thursday, hitting a record low against the dollar – setting the stage for costly imported goods such as cars, electronics, farm inputs and second-hand clothes, electricity among others.

Analysts yesterday said the record rate was a necessary evil.

"Sadly, Wananchi are now going to pay the toll of the State's debt burden, while also shouldering the burden of geopolitical upheaval," said Deepak Dave of Nairobi-based Riverside Advisory.

"Small businesses need capital cost relief, if debt is more expensive they need cheap equity. The only way to do this is to reduce taxes while boosting growth, to put more money into 'hustlers' hands."