Banks warn of more expensive loans as inflation climbs sharply

NCBA Group Managing Director John Gachora. [David Njaaga, Standard]

Individuals and companies should brace for costlier loans as expectations from commercial banks grow over further rate hikes by the Central Bank of Kenya (CBK) in the next few months.

The regulator’s Monetary Policy Committee increased the Central Bank Rate (CBR) to 7.5 per cent at the end of May to tame inflation, which hit 6.47 per cent in April.  

With the inflation rate reaching 7.1 per cent in May, and external headwinds such as rising oil prices and intensifying of Russia’s war with Ukraine, commercial banks expect CBK will take a cue from the United States Federal Reserve to raise the policy lending rate to moderate the persistent rise in the cost of goods and services.

“The Monetary Policy Committee in their last sitting did raise the CBR rate by 0.5 per cent from seven to 7.5 per cent, and I expect given where we see inflation that may continue," NCBA Group Managing Director and chairman of Kenya Bankers Association John Gachora told The Standard yesterday in an interview. 

Raised rates

"We have heard in the US the Federal Reserve, having raised interest rates already significantly, have primed up the market for further raise.” 

“We do expect so long as inflation remains elevated as it is today, that they (CBK) will take measures to make sure inflation comes down and the measure that they use is the monetary measure, which is to raise the cost of money by raising interest rates.”

CBR refers to the rate charged on loans to commercial banks and is announced by the Monetary Policy Committee at least every two months.

CBK Governor Patrick Njoroge. [David Gichuru, Standard]


If the CBK buys Treasury securities from commercial banks, this will expand money supply, but if the regulator sells the securities, money supply will reduce from the market.

When Central Bank tightens money supply, demand for goods and services decreases, leading to lower price pressure. This, however, makes it more expensive for borrowers to get loans.

It will likely lead to reduced spending in items such as vehicles and less financing for capital goods such as machinery for business owners. 

“Banks tend to be the transmission engine of any interest hikes. Our job is to make sure that the policy stance of the Central Bank  is transmitted to the economy and that is what is expected because you don't go to get a loan from the Central Bank, you get it from us," Mr Gachora said.

"For a lot of banks today, their pricing or base rate tends to be the CBR, so whenever the rate moves - the Monetary Policy Committee raises CBR by, let's say, 50 basis points as they did last time - that gets transmitted to the consumer." 

Though Kenya’s direct trade linkages with Russia and Ukraine account for only 2.1 per cent of total goods traded between 2015 and 2020, the economy is vulnerable to commodity price shocks resulting from the war.

Import bill

Kenya is a net oil importer. Imports of refined fuel products amounted to $3.2 billion (Sh374 billion at today's rate) in 2021, which was 15 per cent of total imports.

When Central Bank tightens the money supply, demand for goods and services decreases. [File, Standard]

Increased global prices are putting upward pressure on headline CPI (consumer price index), increasing the costs of fuel subsidies, and leading to a deterioration of the current account balance.

The impact of higher oil prices is not only limited to a rise in the import bill but would also extend to increased cost of production and transportation impacting on the utilities, manufacturing and services sectors.

The government has already said it plans to gradually reduce and finally eliminate the fuel subsidy, possibly within the next financial year.  

Murban crude oil prices have elevated at an average cost of $104.3 (Sh12, 200) per barrel between January and June 2022, with the highest rate of $130.2 (Sh15,233) recorded in March 2022.

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