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Borrowers headed for tough times as CBK raises benchmark rate

By Jackson Okoth | July 8th 2015

People with loans from banks are likely to pay more in the coming months for this service. This is after the Central Bank of Kenya (CBK) raised the rates at which it lends to other commercial banks from 10.00 per cent to 11.50 per cent.

While the new measures are likely to deal with rising inflationary pressure in the economy, it will be a wait and see situation, to see whether the local foreign exchange market, which has been responding to a strong US dollar on the global market, remains calm.

The Monetary Policy Committee (MPC), a key policy organ of the Central Bank of Kenya (CBK), yesterday raised the Central Bank Rate (CBR) from 10.00 per cent to 11.50 per cent.

This is the second increment in a space of two months after the MPC raised the bench mark rate, the price at which CBK lends to other commercial banks, from 8.5 to 10.0 per cent in June, 2015.

“The outlook for the global economy remains uncertain. In particular, the recent developments in Greece, possible turbulence in the global markets, and the uncertainty around the timing of increase in US interest rates are cause for concern,” Monetary Policy Committee Chairman and Governor of Central Bank of Kenya Patrick Njoroge said.

In view of the new CBR, the CBK has revised the Kenya Bankers Reference Rate(KBRR) consistent with its commitment in January 2015 from 8.54 per cent to 9.87 per cent. This level of the KBRR will be effective from July 7, 2015. KBBR is computed as an average of the CBR and the two-month weighted moving average of the 91-day Treasury bill rate.

A customer should therefore expect to be charged a lending rate of KBRR plus charges that may relate to the individual customer’s risk profile, the type of loan or the risks associated with the investment.

The Monetary Policy Committee noted that while the Kenya Shilling has remained under pressure, it mainly reflects the strengthening of the US dollar against most currencies. In addition, the current account deficit widened in part due to increased imports of capital equipment and weak exports.

Foreign exchange

“However, diaspora remittances remain resilient. Interventions by CBK through direct sale of foreign exchange to commercial banks in periods of short-term exchange rate have dampened volatility. The CBK’s level of usable foreign reserves remains adequate at $630.9 million (equivalent to 4.2 months of import cover). The precautionary facility with the International Monetary Fund provides an additional cushion,” said Dr Njoroge.

The Committee also noted elevated risks to the inflation outlook mainly attributed to pressures on the exchange rate over the last few months.

Razia Khan, the regional Head of Economics, Africa at Standard Chartered Bank expects CBK’s move to benefit the Kenyan shilling in the near term.

“The scale of the rate raise, so soon after a previous outsized hike, will also send a strong message to markets. Nonetheless, with the Kenya Banks Reference Rate (KBRR), raised only 133 basis points from its January level, to 9.87 per cent, the authorities may need to do even more to prove their willingness to cool a potentially overheating economy,” Khan said.

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