The Bitter And Sweet Of The CBK’s Hiked Interest Rates; Should Consumers Brace For Impact And Turbulent Landing?
The Central Bank of Kenya (CBK) announced an increase in the Central Bank Rate (CBR) from 10.50 percent to 12.50 percent, a whopping 200 percent jump in base points. This has left tongues wagging given that the last time the Central Bank Rate was above 12 percent was in September 2012 at 13 percent, 11 years ago.
The Monetary Policy Committee (MPC) noted that sustained inflationary pressures, increased risks to the inflation outlook, elevated global risks, and their potential impact on the domestic economy call for tightening of the monetary policy. Inflation for May increased marginally by 10 basis points to eight (8) percent, a rise from the 10-month low of 7.9 percent recorded in April.
“There is a need to adjust the monetary policy stance to address the pressures on the exchange rate and mitigate second-round effects… This will ensure that inflationary expectations remain anchored while setting inflation on a firm downward path towards the 5.0 percent mid-point of the target range,” said the Monetary Committee Policy in a statement.
Inflation dipped to 6.8 percent year-on-year in November from 6.9 percent in October, with the central bank saying on Tuesday that exchange rate depreciation had contributed about 3.0 percentage points to the November reading. The shilling is down more than 19 percent against the dollar this year, having struck repeated all-time lows along the way.
Read Also: Absa Bank Kenya PLC Commits Ksh 100 billion To Empower MSMEs
There is no doubt that the decision by the Monetary Policy Committee (MPC), chaired by the Central Bank Governor, Kamau Thugge, carries far-reaching implications for the Kenyan economy as well as the banks and their customers.
Coming at a time when millions of Kenyans are struggling with the high cost of living occasioned by numerous and higher taxes, the highest cost of fuel; Super Petrol, Diesel, and Kerosene in history, the hiked rates are like adding salt into a fresh leaking wound for Kenyans and business entities.
First, CBR is not just like any other acronym you know. This is a crucial tool used by the CBK to influence economic activity by adjusting the cost of borrowing. As well know, millions of Kenyans and businesses roll on the wheels of borrowing and loans. There is no doubt about that.
Now, when the CBR rises with such a big margin, it becomes more expensive for Kenyan commercial banks to borrow money from the Central Bank, leading to higher interest rates for consumers and businesses. What this means is, that banks will have to also adjust their interest rates upwards while lending, hence more tears and sweating for those planning to take loans and those with already existing loans.
The immediate effect of the CBR hike is an automatic increase in borrowing costs across the board. This is without question. Interest rates will have to go up whether people like it or not. Whether one is considering a mortgage, personal loan, or business financing, higher interest rates mean larger monthly repayments.
With such higher interest rates slapped on borrowers, there is a huge possibility for a slowdown in borrowing and investment activities, affecting both individuals and businesses. With this in mind, we are likely to see businesses adopting the wait-and-see approach before taking on new projects or even completing the existing ones.
This also has the potential of increasing non-performing loans. These are loans that borrowers are more likely to delay in paying or default, hence a more likely scenario of increasing auctioneering activities during the coming days as banks and financial institutions scramble to recover what they are owed.
Read More:
In the mind of the CBK, the current