CBK in first rate hike in 7 years, benchmark rate rises to 7.5% to counter inflation

The Central Bank of Kenya (CBK) has raised its benchmark lending rate for the first time in nearly seven years in what it has described as an attempt to combat rising inflation.

The benchmark lending rate or the Central Bank Rate (CBR) subsequently moved up by 50 basis points to 7.5 per cent from seven per cent, the first-rate hike since July of 2015.

The move to raise rates is seen as the reserve bank’s eventual acknowledgement of the pressure paused by rising consumer prices through the first half of 2022.

The rate hike follows 13 consecutive holds of the CBR since May of 2020 with the reserve bank stating inflation had on the multiple occasions held within expectations.

“The (Monetary Policy) Committee noted the elevated risks to the inflation outlook due to rising global commodity prices and supply chain disruptions, and concluded that there was scope for a tightening of the monetary policy in order to further anchor inflation expectations,” noted the CBK.

Overall inflation in April soared to a seven-month high of 6.47 per cent from 5.6 per cent in March from costlier food and fuel prices, a matter both directly and indirectly tied to the global commodity prices surge from the Russia-Ukraine conflict.

The rate of inflation is widely expected to be higher in May from the twin-rise in food and fuel costs pushing the rate of inflation closer to the CBK’s upper ceiling target of 7.5 per cent with the Kenya National Bureau of Statistics (KNBS) set to publish the consumer price index (CPI) data on Tuesday.

The committee noted the adverse impact of the ongoing Russia-Ukraine conflict and other global disruptions on the Kenyan economy through increases in commodity prices particularly fuel, wheat, edible oil and fertilizer.

The majority of respondents in CBK Monetary Policy Committee (MPC) surveys expressed concerns about rising inflation alongside supply chain disruptions and increased political activity.

Central Banks around the world have been raising interest rates to combat rising inflation including the US Federal Reserve and the Bank of England (BOE), a bandwagon that the CBK now joins.

Ideally, higher interest rates increase the cost of borrowing making credit to both the private sector and government more expensive in a move done to cool a heated economy.

While the CBK is yet to highlight its predicted impact of higher interest rates, a higher CBR will set off a higher cost of borrowing from commercial banks and may restrain private sector lending which has only hit double-digit in recent months since the pre-interest rate cap era.

Private sector credit growth stood at 11.5 per cent in April 2022 from 9.1 per cent in February with sectors such as transport and communication, manufacturing, trade, consumer durables and business services.

“The number of loan applications and approvals remained strong reflecting improved demand with increased economic activities,” added the CBK.

The surprise rate hike aligns to part of market expectations with the Kenya Bankers of Association (KBA) for instance having called for the tightening of monetary policy last week to contain the runaway cost of living.

The heated cost of living has nevertheless been checked by the recent waiver of import duty on maize, subsidized fertilizer prices and the fuel price stabilization mechanism (fuel subsidy), interventions which are expected to moderate domestic prices.