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CBK hits borrowers hard to save shilling

Dr Patrick Njoroge, the Central Bank of Kenya governor. PHOTO | DIANA NGILA
Dr Patrick Njoroge, the Central Bank of Kenya governor. PHOTO | DIANA NGILA  

Central Bank of Kenya governor Patrick Njoroge on Tuesday led his first Monetary Policy Committee (MPC) meeting into increasing the benchmark Kenya Banks’ Reference Rate (KBRR), setting borrowers on the path to paying higher cost of loans.

The MPC increased the base rate (KBRR) to 9.87 per cent from 8.54 per cent and raised the policy Central Bank Rate (CBR) for the second time in as many months in a move aimed at taming inflation pressure and stabilising the shilling, which touched the 100 units to the dollar mark on Monday. 

KBRR’s rise to 9.87 per cent paves the way for banks to add own risk premium, dubbed “K”, on this higher base rate beginning Wednesday morning.

That decision effectively raises interest rates on new and existing bank loans that currently attract an average interest rate of 15.5 per cent.

Analysts said the move represents a mark of decisiveness on the part of Dr Njoroge who took charge of the country’s monetary policy last month, but warned that it could come at the expense of slower economic growth as a result of reduced investments and consumption.

“The raise has exceeded market expectations and I actually did not see it coming. The economy is very soft and it will most likely slow down with the higher interest rates,” said Aly-Khan Satchu, the CEO of Rich Management, a data vendor firm.

“The governor has moved too quickly to raise the policy rate given this is his first MPC meeting. I expected him to make changes in the next meeting.”

In raising the cost of credit, Dr Njoroge hopes that consumption, especially of imported goods and services will slow down and help tame the current account imbalance that has been one of the main causes of the shilling’s woes.

The increase in the CBR from 10 per cent to 11.5 per cent also portends a possible rise in the cost of funds for commercial banks, setting the stage for another possible jump in the KBRR in January.

Kenya’s GDP grew by 4.9 per cent in the first quarter compared to 4.7 per cent in the same period last year, driven by improved performance in construction and financial services that will now be vulnerable to higher interest rates.

The higher interest rates are expected to knock down the Treasury’s rosy growth projection of up to seven per cent this year— which was based on interest rates remaining stable at around the current levels.

The new KBRR remains in force for the next six months unless market developments force the MPC to review the rate earlier than scheduled.

The CBK’s decision to raise the benchmark CBR twice in a month to a cumulative 11.5 per cent to tame inflation and support the shilling was the MPC’s biggest shocker.

The CBR previously stood at 8.5 per cent before it was raised to 10 per cent in June and subsequently to 11.5 per cent in yesterday’s MPC meeting.

The KBRR, a credit pricing tool that the CBK introduced last year, is the average of the CBR and a two-month weighted average of the 91-day T-Bill.

By raising interest rates, the CBK intends to tighten liquidity and ultimately slow down inflation and support the shilling that weakened to new lows of 100 units to the dollar this week.

“The committee noted the elevated risks to the inflation outlook mainly attributed to pressures on the exchange rate over the last few months,” reads part of a statement from the MPC.

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