Kenya: CBK raises cost of loans to rein in inflation

The Central Bank of Kenya has signalled lenders to raise borrowing costs in a bid to rein in expectations of runaway inflation amid weakening shilling in a net import economy.

The bank’s Monetary Policy Committee (MPC), the top-decision-making organ tasked with stabilising prices, raised the benchmark interest rate by 50 basis points to 8.75 per cent.

The new policy lending rate is the highest since November 2019 when it was pegged at 9.0 per cent at a time when the now scrapped interest rate controls were still in force.

“The 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 the monetary policy in order to anchor inflation expectations,” CBK Governor Patrick Njoroge, chair of MPC, said in a statement. Inflation — a measure of the cost of living over the last 12 months— October climbed to a five-and-a-half-year high of 9.6 per cent in October from 9.2 per cent a month earlier on elevated food and energy prices.

This is despite the MPC raising the central bank rate 75 basis points to 8.25 per cent during their previous meeting in late December.

The latest signal to raise the cost of credit, the third in four MPC meetings, comes at a time when the economy is witnessing increased demand for loans amid the recovery from Covid-19 economic hardships.

Latest banking industry data shows credit to the private sector rose 13.3 per cent year-on-year in October from 12.5 per cent in August.

The strongest growth in loans was posted in the manufacturing sector at 17.5 per cent followed by trade (15.3 per cent), business services (13.2 per cent) and consumer durables (14.0 per cent).

“The number of loan applications and approvals remained strong, reflecting improved demand with increased economic activities,” Dr Njoroge said in the statement.

Banks use a base rate which is normally the cost of funds, plus a margin and a risk premium, to determine how much they charge a particular customer.

The lenders largely use the CBR as the base rate when revising the risk premium in what will now increase the cost of borrowing.