Kenya braces for defaults, expensive credit with benchmark rate at seven year high

Kenya’s new Central Bank Governor Dr Kamau Thugge has raised rates by 100 basis points to a seven year high of 10.5 percent, in an emergency meeting in his first days in office that has bewildered the market as to the urgency of such a hike.

Inflation remains high at 8 percent in May but just slightly higher than 7.9 percent in April when his predecessor former Governor Patrick Njoroge held rates unchanged at 9.5 percent.

Analysts say the new Governor may be anticipating a surge on inflation this month after President William Ruto accented to the new Finance Act that seeks to impose a raft of tax measures including doubling of value added taxes on fuel.

Dr Thugge said he expects cost of living to rise on increase in electricity prices, the removal of fuel subsidies, and associated secondary impact on most goods in the economy as well as high cost of sugar and maize impacting food costs.

Churchill Ogutu, an Economist at IC Capital, said if the Finance Act propelled the decision, then the CBK was targeting cost push inflation with tools to tame demand push. He added that he did not see the reason for the urgency by the new Governor considering all other members of the MPC had visibility of the data when CBK previously chose to hold.

“We usually expect the MPC to sit every other odd month so the urgency was a surprise. I think maybe CBK is anticipating the Finance Act, but even that will be more of a cost push issue and they are trying to address that with a hundred basis point hike,” he said.

Other analysts have pointed out Dr. Thugge may be trying to clean up the slow pace of raising rates by the previous Governor amid global surge in interest rates.

Over the last one year, the US Federal Reserve Bank has raised rates from zero to 5.5 percent, while CBK had only raised rates from 7 to 9.5 percent. The US Fed chair, Gerome Powell, told a House of Representatives committee that with inflation in the United States still excessive, most Federal Reserve officials expect to raise interest rates further this year.

As interest rates rise, Kenyan borrowers should  brace for a surge in borrowing costs that has already hit the government, which is currently getting short term loans above 11 percent and medium term debt at over 14 percent.

This is likely to push corporates and individuals already struggling with their loan commitments into default.

Non-Performing Loans (NPL) are already at record 14.9 percent in May up from 14.6 percent in April, signaling deteriorating loan books.

Banks through their lobby, the Kenya Bankers Association (KBA), had appealed for a pause in raising interest rates fearing the surge in bad debts could lead to an economic slowdown as banks cut lending to private sector to avoid getting burned by defaults.

“Private sector credit continued to post a double-digit growth in 2023 despite at a decelerating pace, reflecting the impact of the transmission of the strong monetary policy tightening effected since May 2022 and the deteriorated industry asset quality,” said the KBA.

“Going forward, expectations of a slowdown in economic growth and elevated inflationary pressures in 2023 are likely to further exacerbate credit risks and thus asset-quality deterioration, thereby further slowing down private-sector credit loan growth,” said the lobby.

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