More pain for borrowers as CBK moves to rein in living cost crisis

The Kenya Kwanza administration has made the latest radical attempt to rein in the runaway cost of living crisis by raising the cost of borrowing.

In what will put to test the government's plan to tame the free fall of the shilling, the Central Bank of Kenya (CBK) yesterday raised its benchmark lending rate by a record 200 basis points to 12.50 per cent from the previous 10.50 per cent.

The rate - the highest in a decade and near levels last witnessed in 2012 during the Kibaki era, is in a bid to stabilise the flagging shilling and rein in the runaway cost of living, according to CBK Governor Kamau 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 borrowers set to feel the financial pain of the increased cost of loans. 

This could translate into banks tightening their lending standards.  

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

The latest increment 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.  

At the same time, higher rates have increased borrowing costs.

Dr Thugge, however, defended the hike, saying it is the best weapon to cool off the shilling in the prevailing circumstances.

In a rare press conference last evening, Dr Thugge acknowledged the country's currency crisis, saying it has resulted in negative consequences throughout the economy.

He emphasised that the depreciation of the shilling has adversely affected Kenya's investment climate and has increased the burden of debt repayment, while also intensifying the cost of living.

“Foreign investors are hesitant about coming because of the exchange rate. Same thing with domestic investors,” said Dr Thugge. “Depreciation is having a strong impact on the cost of living,” he said.

The depreciation of the shilling, caused by the surging US dollar, has led to soaring prices of essential goods, further exacerbating the financial distress faced by many Kenyans.

Additionally, the ongoing food and energy crises, linked to Russia's invasion of Ukraine, have compounded the economic challenges.

A weakening shilling is causing pain to importers and consumers across the country, hindering the government’s efforts to rein in the stubborn cost of living.

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.

The weakened shilling has hurt the stubborn inflation, which measures the rate of rising prices and remained at 6.8 per cent, in September 2023 despite CBK’s efforts to tame it. Dr Thugge said nearly half of the cost of living measure is linked to the shilling woes.

“This to decisively deal with the issue of inflation,” he said.

“This explains why we've taken this strong action so that we can address the issue of cost of living and debt service payment.”

Experts, however, said the monetary policy stance would herald economic pain for already hard-pressed Kenyans.

“This would make the economy even weaker, push up the cost of goods and so on,” said Deepak Dave of Nairobi-based Riverside Advisory.

“It would also make the government’s deficit financing even more expensive.”

Dr Thugge, however, said the CBK’s action “removes the uncertainty” of the exchange rate movement. “We are aware of its potential costs one being the impact it will have on growth,” said Thugge.

“If we continue with the situation where people don’t know where the exchange rate is going tomorrow it's not healthy for the economy.”  The local instability in the exchange rates means that with Sh1,000, many families can no longer buy as much as they used to get a few months back.

The shilling has been on a free fall, hitting an all-time low against the dollar in the recent past, signalling inflation and higher costs of imported goods.

CBK data showed the shilling exchanged at an average of 153 against the dollar yesterday. However, some traders were exchanging it at Sh160 to the dollar. A weak shilling is harmful to the country given it is an import-driven economy.

Kenya imports numerous goods, including cars, petroleum, machinery, medicine and pharmaceutical products, vegetable oil, wheat, clothing and shoes.

A weaker shilling will keep the price of imports such as fuel elevated.