Living cost, shilling tests as CBK holds MPC meeting

President William Ruto, CBK Governor Kamau Thugge (second-left) during the launch of the Central Securities Depository digital platform last year. [PCS, Standard]

The Central Bank of Kenya (CBK) is set to hold its first monetary policy committee meeting (MPC) for the New Year tomorrow against the backdrop of rising inflation and a weakened shilling.

A jump in the prices of essential commodities, including cooking oil, and flour as well as energy costs on the back of new levies and taxes, have squeezed household budgets and weakened the purchasing power of a majority of Kenyans.

This means Kenyans are forking out more to purchase basic commodities as the shilling remains weakened due to external pressures.

The financial hardships pose an economic and political problem for President William Ruto’s administration, which was elected on a platform to lower the cost of living, rattling its support base.

 At its last bi-monthly meeting in December, the inflation-targeting Kamau Thugge-led MPC raised its policy lending rate by 200 basis points to 12.50 per cent from the previous 10.50 per cent to stem rising inflation and stabilise the shilling. Thugge is the CBK governor.

The CBK benchmark rate hike - the highest in a decade and near levels last witnessed in 2012 during the Kibaki era - was in a bid to stabilise the flagging shilling and rein in the runaway cost of living, CBK governor Thugge said. It was the first rate increase since June when it was raised it by one percentage point.

In the last week the Shilling has steadied around Sh160 to the dollar according to the CBK official printed mean rate. Retail dollar buyers are however paying up to Sh167 per unit in banking halls and forex bureaus as the demand for the greenback remains elevated.

Co-operative Bank of Kenya was selling the dollar at Sh165 per unit on Friday same as Stanbic Bank, Family Bank and I&M Bank while Equity Bank was selling the US currency at Sh165.5 and buying at Sh160.5 as per their own daily rates update posted in banking halls.

Kenya’s inflation — a measure of annual changes in the cost of living— rose to 6.9 per cent last month from 6.6 per cent a month earlier (December) due to an increase in commodity prices, the Kenya National Bureau of Statistics reported. This is however within the 2.5 and 7.5 per cent target band by the CBK.

The cost of living in Kenya is expected to be elevated in the first half of this year according to the International Monetary Fund (IMF), in what could herald more rate hikes by the CBK.

 “Inflation is expected to inch up in the first half of 2024, driven primarily by global oil price volatility and exchange rate passthrough but to remain contained due to the recent monetary policy tightening and as the authorities strive to deliver a stronger fiscal consolidation to stabilise the overall public debt and GDP in 2024,” said the IMF.

The Bretton Woods institution has asked the CBK to consider tightening the base rate further to limit spillover effects. "On monetary policy, the authorities agree on being proactive, as also demonstrated in their decisive 200-basis-point December policy rate hike, and maintaining a tightening bias given risks to inflation outlook," says the IMF.

"Staff estimates exchange rate passthrough to inflation between 0.2 and 0.4 percentage points over a year for a one percent change in the exchange rate, broadly in line with the authorities' own estimate," said IMF. 

"Staff also finds evidence of exchange rate depreciation having somewhat larger passthrough than appreciation."

There are fears the widely expected tightening of liquidity will hurt access to credit for already strained individuals and companies.

Already, banks have received the CBK signals and have been steeply increasing the cost of their loans in line with the rate tightening.

"Due to the prevailing macro-economic environment, the increasing interest rates including the recent increase in the Central Bank Rate (CBR), we wish to advise you that our new Base Lending Rate for Kenya Shilling Credit Facilities is now 15.5 per cent per annum with effect from January 15, 2024," said Co-op Bank in a notice.

The new increases have seen interest rates for leading banks hurtle towards 30 per cent, ending the era of cheap loans. The Kenya Kwanza administration remains under pressure to put measures in place to shield consumers and companies from the full impact of surging energy and food costs this year.

Inflation has been on an upward trend since the beginning of 2023. It peaked in July at 8.3 per cent but declined to 6.6 per cent in December. It ticked down to 6.6 per cent in December from November’s 6.8 per cent. December’s reading represented the lowest inflation rate since April 2022.