CBK signals costly loans after hiking rates to five-year high


Outgoing Central Bank of Kenya (CBK) Governor, Patrick Njoroge. FILE PHOTO | DIANA NGILA | NMG

The Central Bank of Kenya (CBK) has increased the benchmark lending rate to the highest level in five years to curb inflation, signalling costlier loans for homes and businesses.

The Monetary Policy Committee (MPC) increased the CBK rate to 9.5 percent from 8.75 percent, matching the 0.75 percentage rise of September last year that triggered banks to increase lending rates.

The jumbo rate hike is aimed at easing demand for credit in the hope of cooling inflation, which rose to 9.2 percent in February from 9.0 percent in January, reversing the fall in the cost of living measure for three consecutive months

The 9.5 percent rate is the highest since March 2018 and will egg banks on to make a fresh round of lending rate increases that will hurt businesses in a recovering economy.

The average cost of bank loans hit a 52-month high in December at 12.67 percent in the wake of the CBK rate hikes and rising yields on government paper.

The higher cost of loans risks locking out businesses from accessing the credit they need for expansion and in turn, limiting their ability to create more jobs.

“The Monetary Policy Committee noted the sustained inflationary pressures, the elevated global risks and their potential impact on the domestic economy, and concluded that there was scope for a further tightening of monetary policy in order to anchor inflation expectations,” said CBK Governor Patrick Njoroge, who presided over his second last MPC meeting before his term ends in June.

Kenya’s inflation has since June breached the target range of 2.5-7.5 percent, prompting the MPC to raise benchmark interest rates to curb consumer spending.

Despite increasing the benchmark lending rate by a similar margin in September, inflation has remained outside the preferred government range of 2.5-7.5 percent since June last year.

Costly food and fuel due to the worst drought in 40 years and Russia’s war in Ukraine pushed inflation from 7.1 percent in May.

The CBK rate has been increased thrice in six months, including September’s MPC meeting.

Dr Njoroge said MPC acted because “inflation is expected to remain elevated in the near term”, partly because of further increases in electricity prices.

The central bank said that surveys conducted before the MPC met showed declining optimism about business activity and economic growth prospects for the next 12 months.

“Respondents expressed concerns over elevated domestic inflation, the weakening of the Kenya shilling, and high food prices,” Dr Njoroge said.

The CBK joins central banks across the globe, from Ghana to the US, that are still increasing interest rates to fight high inflation.

Last year, commercial banks increased their cost of loans after the upward review of the benchmark rate.

Absa Bank Kenya, in an investor briefing earlier this month, disclosed it had adjusted its average yields on loans from 9.7 percent in 2021 to 11 percent in 2022 to reflect changes in the interest rate environment.

The CBK reckons that the number of loan applications and approvals declined, reflecting reduced demand.

In November, it had forecast Kenya’s inflation rate to fall within the government’s target range early this year.

“We are addressing the inflation momentum that is there and the policies that were put there, we believe are appropriate,” Dr Njoroge said on November 24.

“Consequently, we would expect the inflation outcome to begin to come down in the near future and hopefully early next year we will see the outcome in the target band.”

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