Borrowers in Kenya are bracing themselves for a financial hit as the Central Bank of Kenya (CBK) announces an increase in the benchmark lending rate by 50 basis points to 13 percent.

This decision, aimed at curbing inflation, marks the third rate hike since Governor Dr. Kamau Thugge assumed office in June 2023.

In their February meeting, the CBK's Monetary Policy Committee (MPC) scrutinized lending rates, escalating them to levels last observed in 2012. The CBK, acknowledging persistent inflationary pressures, cited the challenge posed by "sticky" overall inflation.

The move comes amidst a backdrop of escalating prices, with January witnessing a marginal uptick in inflation to 6.9 percent, primarily fueled by rising food costs.

The MPC highlighted a surge in food inflation to 7.9 percent from December's 7.7 percent, attributing it to increased prices of select non-vegetable items, exacerbated by diminished supply, partly influenced by seasonal dynamics.

Moreover, fuel inflation surged to 14.3 percent in January, a climb from December's 13.7 percent, propelled chiefly by elevated electricity tariffs in Kenya.

At the same time, non-food non-fuel inflation also rose to 3.6 percent in January, reflecting seasonal upticks in education-related expenses during the back-to-school season.

Addressing the imminent risks, the CBK stated, "The risks to inflation remain elevated in the near term, reflecting the impact of second-round effects of the rise in fuel inflation, and pass-through effects of exchange rate depreciation."

Read also: CBK rate pushes banks’ limits to keep loan rates low

Loan default

The decision to raise interest rates reverberates throughout the banking sector, as lenders have begun implementing higher rates, nudging borrowers perilously close to loan default.

Despite last week's appeal by the Kenya Association of Bankers to maintain the key rate at 12.5 percent, concerns linger over deteriorating asset quality, evident in the industry’s Non-Performing Loan (NPL) ratio, which rose to 15.3 percent in October 2023 from 14.7 percent in July 2023.

In contrast, the CBK announced a slight improvement in the ratio of gross non-performing loans (NPLs) to gross loans, dropping to 14.8 percent in December 2023 from 15.3 percent in October 2023.

Notably, decreases in NPLs were observed in various sectors including energy and water, manufacturing, agriculture, building and construction, and transport and communication, with banks making adequate provisions for NPLs.

Despite these challenges, the MPC noted robust credit growth in key sectors such as manufacturing (20.9 percent), transport and communication (20.8 percent), trade (13.1 percent), and consumer durables (9.9 percent).

Moreover, the resilience in the number of loan applications and approvals underscores sustained demand, particularly for working capital requirements.

As borrowers grapple with higher loan costs and inflationary pressures persist, the CBK's decision underscores a concerted effort to navigate the delicate balance between stimulating economic growth and controlling inflation, reflecting the challenges facing Kenya's financial landscape in the months ahead.

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