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Act to save Kenyans from high bank interest rates

Prices have skyrocketed and they are likely to keep rising with the ongoing war in Ukraine which has disrupted the supply chain of items such as fuel, wheat, and fertiliser. [iStockphoto]

A lot of banks have started increasing their internal base lending rates, which means that the cost of money or interest rates charged on loans will also increase.

The increase follows a decision by the Central Bank of Kenya (CBK), the financial regulator that is also charged with maintaining price stability, to increase its benchmark lending rate from seven per cent per annum to 8.25 per cent per annum.

The increase in the benchmark lending rate or the Central Bank Rate (CBR), was aimed at curbing a further increase in prices of goods and services or what is technically known as the inflation rate.

Because CBR is the rate at which CBK lends to banks, it is a tool that the regulator uses to control the flow of money into the economy, and therefore lenders charge consumers high-interest rates if they borrow at a higher rate from CBK.

The decision by the Monetary Policy Committee, the organ responsible for monetary policy, is understandable. Prices have skyrocketed and they are likely to keep rising with the ongoing war in Ukraine which has disrupted the supply chain of items such as fuel, wheat, and fertiliser.

A high inflation rate is not good for the economy. Millions of people find it hard to afford basic commodities and investors cannot plan well when the prices keep on rising. CBK is thus trying to arrest the situation. After all, it is expected to maintain inflation at a target of between 2.5 per cent and 7.5 per cent. The inflation rate is now far above that target.

The economy is still reeling from the aftershocks of the Covid-19 pandemic. Businesses need loans to rebuild. People need money to start businesses. That money needs to come cheap otherwise very few Kenyans, most who are in the informal sector, will afford to get credit from banks.

The government needs to delicately walk through this dilemma to ensure that prices are kept low even as cheap credit is availed to small businesses. It is a tough balance, but it will help Kenyans.