CBK shakes market with high loan rates

The Kenyan government and households are bracing for higher cost of borrowing after the Central Bank of Kenya (CBK) raised interest rates by 75 basis points to 9.5 percent, a level last seen five years ago. 

The higher Central Bank Rate (CBR) means banks will adjust borrowing rates upwards hitting homes and small businesses which the Kenya Kwanza government had been promising single digit loan rates. 

Government will not be spared either and will be forced to pay a higher return for bonds and bills over and above 14 percent.

CBK Governor Patrick Njoroge, who is set to leave the CBK mid this year, said the Monetary Policy Committee (MPC) pushed up interest rates to mitigate fallout of higher rates in developed markets. The Americans and Europeans have been raising their rates causing a dollar outflow that has weakened the shilling and increased the cost of living through expensive imports.

The US Federal Reserve increased rates 25 basis points to 5 percent while the European Central Bank raised its benchmark rate 50 basis points to 3 percent. 

The move by the developed economies to tackle their runaway inflation has seen foreign investors pull dollars out of countries such as Kenya thereby weakening the local currencies. 

The higher rates now mean that Kenya will find it expensive to borrow from local banks and almost impossible to access the Eurobond markets where it could get alternative sources of dollars. 

“The MPC noted the sustained inflationary pressures the elevated global risks and their potential impact on the domestic economy and concluded there was scope for further tightening of the monetary policy in order to anchor inflation expectations,” Dr Njoroge said.

Inflation for February hit 9.2 percent on end of subsidies and increase in electricity prices that has seen opposition instituted protests across the country.

Read also: NCBA forex income up 147 percent to Sh12.5 billion

Analysts had predicted a modest 25 basis point increase seeing that there was no serious source of inflation as the long rains are anticipated to ease the cost of goods.

An analyst told Maudhui the CBK could have raced more aggressively to stem import demand as they re-open a functioning dollar interbank market to manage the shilling exchange rate.

Kenya’s dollar interbank had been obscured by CBK controls which created a divergence between the quoted official rates and the market prices but the government has pushed the regulator to let the market discover its own price.

The shilling has tumbled to 131.7 against the dollar even as some lenders quote as high as 140; on higher import demand, an opaque currency market and outright speculation.

Analysts also said the only other outlying inflationary pressure would come from the further increases in electricity prices after the Energy and Petroleum Regulatory Authority (Epra) approved new tariffs to protect Kenya Power from financial distress, hitting small commercial consumers and the middle class with an extra Kes2.7 billion monthly bills. 

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