With the shilling depreciating in a net import economy, the Central Bank of Kenya has signaled lenders to hike loan charges to stem fears of an inflationary runaway.
The bank’s highest decision-making body, the Monetary Policy Committee (MPC), which is charged with maintaining price stability, increased the benchmark interest rate by 50 basis points yesterday, bringing it to 8.75%.
The new policy lending rate is the highest it has been since November 2019, when interest rate regulations were still in place but have since been eliminated.
An increase in the primary lending rate would increase the cost of borrowing money, causing consumers and businesses to cut down on their spending in an effort to keep prices down.
With the economy seeing greater demand for loans as it recovers from the Covid-19 economic troubles, the MPC has once again signaled its intention to hike interest rates (this time, the third time in four sessions).
The most recent statistics from the banking sector reveal that private sector credit increased by 13.3 percent annually in October, up from 12.5 percent in August.
Manufacturing saw the highest rate of loan growth at 17.5%, followed by commerce (15.3%), business services (13.2%), and durable goods for consumers (14.0 percent).
The interest rate a bank charges its customers is calculated by adding the cost of funds, or base rate, to a margin and a risk premium.
Borrowing costs will rise as a result of lenders using the CBR as the basis for recalculating the risk premium.