CBK rate increase signals surge in cost of loans

Central Bank of Kenya (CBK) on Thursday raised its benchmark lending rate by 1.5 per cent to 18 per cent, setting the stage for a fresh round of a rise in borrowing costs.

The Monetary Policy Committee (MPC) said it has increased the rate to curb rising inflation, which grew for 13th straight month to a new high of 19.72 per cent this month, and stabilise the shilling.

This come against analysts forecast of the rate being little changed at time when the market is fretting over increased defaults and slowed down in consumption due to high lending rates.

“The committee therefore decided to revise upwards the Central Bank Rate…to ease inflation and contain inflationary expectations,” said Central bank Governor Njuguna Ndung’u in a statement.

He added that the intervention would slow down the uptake of credit, which is fuelling inflation, and steady the shilling, which stood at Sh89.75 to the dollar down from Sh107 in October. “The tightness of the market was also noted to have dampened demand for imports, thereby easing pressure on the exchange rate,” added Prof Ndung’u, who is also the chairman of the MPC.

The MPC has in the past two months took the unprecedented decision to increase the benchmark Central Bank Rate by more seven percentage points pushing commercial bank average lending rates up from 21 per cent to 27 per cent. Commercial banks are extending the loan repayment periods to prevent a steep rise in monthly installments and starve off mass defaults.

“While we had expected some tightening to prevent real interest rates from becoming too negative, it is clear that the CBK now means to put all its clout behind taking decisive action to combat inflation once and for all,” said Razia Khan,Standard Chartered’s lead economist.