New CBK rate puts borrowers on notice

BY JACKSON OKOTH

It is going to be even more expensive to access a bank loan or repay an existing one. This follows a move by Central Bank of Kenya (CBK) to increase yet again, the Central Bank Rate (CBR) - interest rate at which it lends money to local banks.

While borrowers are feeling the pinch from expensive bank credit, matters are expected to get worse as banks adjust their rates further, in response to CBK’s latest move to raise the CBR from 16.5 per cent to 18 per cent.

A higher CBR appears to be the preferred method that CBK is using to help reign in an economy, which is experiencing inflationary pressure that is higher than is desired.

It was widely anticipated that CBK would tighten credit further when the recently released inflation figures showed a relentless upward movement.

The November monthly inflation figure increased to 19.72 per cent compared to 18.9 per cent recorded in October. "The CBK’S game plan is to increase cost of credit so that consumption of imported items can go down, reducing pressure on the exchange rate. The effect of a stronger shilling will filter into lower prices for such items as fuel and electricity, resulting in lower prices for locally produced goods and services," said Karithi Murimi, a risk consultant.

While it takes a while for monetary policy measures to take effect, efforts by CBK to starve off cash from commercial banks continues to bear fruit. The shilling has been gaining against the US dollar in recent weeks while inflation is still on the rise but at a decreasing rate.

Hike in rates

"A decision by the CBK to increase the cash reserve ratio and Central Bank rate has slowed down lending from banks. It has also slowed down consumption of such imported items as cars, machinery and luxury goods, which use up foreign exchange reserves. This is what is causing the shilling to gain strength," said Murimi.

In recent weeks, the shilling has been trading in the Sh89.85-Sh90.00 to the US dollar, extending its gains for the first time in as many months.

Apart from cooling off demand-pull inflation, CBK is also determined to wean off cash from banks to prevent them from engaging in speculative activity in the local foreign exchange trading market.

Treasury Bills

An under subscription in the Treasury Bills auctions in recent weeks displays a cash strapped banking sector. A rise in lending rates by the banks has also affected the Government, which is considered the biggest spender in the economy.

"The shilling is expected to settle as between Sh80-95 in the coming months as a tight monetary policy stance continues to take effect," said Murimi.

"There is a time lag for monetary policy actions to take effect, including controlling inflation. CBK has been able to slow down both money supply and liquidity and it will take the next two to three months before a slowdown on inflation is apparent," said Reginald Kodzutu, an investment analyst with Amana Capital Limited.

While rainfall is currently being experienced in many parts of the country, supply constraints due to difficulty in accessing markets through impassable roads, have kept food prices up.

"A rise in the price of such items as wheat or beef is merely a supply issue and this is why their prices are on the rise," said Kodzutu.

Kenya’s monthly inflation figure is expected to oscillate between 19 and 20.7 per cent by the close of the year with rising energy costs seen as the main driver.

What the CBK has done is to simply slow down demand. The objective is to stabilise the shilling and control inflation.

"I do not expect the CBK to raise the CBR any further as this action will be counterproductive. What the CBK aims to achieve is to create equilibrium between demand and supply," said Kodzutu.

While Inflation is still up, the only macroeconomic formula available to monetary authorities seems to be pushing up the Central Bank Rate (CBR).

The CBK’S game plan is to increase cost of credit so that consumption of imported items can go down, reducing pressure on the exchange rate. The effect of a stronger shilling will filter into lower prices of such items as fuel and electricity, resulting in lower prices for locally produced goods and services.

"With CBK’s inflation target at 9 per cent, the monetary authority has a gap of more that 10 per cent to deal with. The only option left is for it to use tools available to reduce the shilling exchange rate and impact of borrowing from commercial banks.

At the moment, Kenya is still importing most of the basic food items. Thus, the only way to bring down food prices is to reduce the shillings exchange rate, thereby increasing food supply through cheaper imports.

Imports

It is also expected that the ongoing rains will reduce the impact of imported food items as local supply increases. Given that Kenya is a net importer, high cost of borrowing will alter consumption patterns as demand shifts to locally produced goods and services.

During these turbulent economic times millions workers are facing, payday loans are becoming a popular source of short-term financing. This has been especially true for low-income families.

These loans usually carry a high price tag. Finance charges are from 15 to 30 per cent of the amount being borrowed. Since it’s 15 to 30 percent on just a few weeks, if’s comparable to getting a loan with an annual percentage rate of nearly 800 per cent.

Because payday loans are so easy to get and lack the traditional credit checks, companies and co-operatives societies often give out these loans easily knowing they are more likely to recover.

The down side to this is most of these people are already experiencing financial hardship and borrowing money with such a high interest rate just makes matters worse. In addition, many of these people find themselves unable to repay the loan when it is due. This situation leads to resorting to more borrowing and being clogged up in a vicious circle.

There are many alternatives to getting a payday loan. The best thing you can do to avoid these types of loans is to create a budget so that you afford paying bills. Cut out as many unnecessary purchases as possible.

Put that money into a savings account. Even the loose change found around the house can be put into savings. Set a budget for groceries, cell phones and fuel consumption.