CBK in third 2022 interest rate hike

CBK in third 2022 interest rate hike

  • The latest rate hike represents the third such adjustment in the Central Bank Rate (CBR) this calendar year as the reserve bank weighs in on the effects of higher inflation and tightening monetary policy in advanced economies.
  • Cumulatively, the CBK has since May lifted the benchmark interest rate by 175 basis points/1.75 per cent from a flat seven per cent at the beginning of the year.

The Central Bank of Kenya (CBK) has lifted the benchmark interest rate by 0.5% to 8.75 per cent from 8.25 per cent.

The latest rate hike represents the third such adjustment in the Central Bank Rate (CBR) this calendar year as the reserve bank weighs in on the effects of higher inflation and tightening monetary policy in advanced economies.

CBK’s Monetary Policy Committee (MPC) stated that sustained inflationary pressure and heightened global risks have warranted yet another hike to the benchmark interest rate which had not moved upwards prior to May this year in nearly seven years.

“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,” the CBK said in a press statement on Wednesday.

In addition to fighting inflation which peaked at a new five-year high of 9.6 per cent in October, the lifting of the key lending rate is expected to cushion the Kenyan shilling from further depreciation against the US dollar which has strengthened off the back of similar policy tightening by the US Federal Reserve.

“Inflation pressures are showing signs of abating in some major economies, but remain elevated mainly reflecting high energy prices and persistent supply chain challenges,' added CBK.

"However, the volatility in global financial markets remains elevated amid significant US dollar strength against major currencies and the recent rapid changes in policy stance in advanced economies in response to inflationary pressures.”

Cumulatively, the CBK has since May lifted the benchmark interest rate by 175 basis points/1.75 per cent from a flat seven per cent at the beginning of the year.

While the intended effect will be cushioning against inflation and a weaker local currency, the rate hikes are expected to set the stage for an even higher cost of borrowing for both the government and the private sector.

The average commercial bank lending rate, for instance, hit a 34-month high of 12.41 per cent at the end of September while the return on the 364-day Treasury bill (T-bill) has recently breached 10 per cent.

The higher cost of borrowing is expected to complicate the government’s plans for cheaper domestic credit with President William Ruto having recently expressed his desire to see the cost of government borrowing at sub-10 per cent.

Wednesday's rate hike is against wide expectations for a tightening pause with analysts having argued previous lifts in May and September had not resulted in lower inflation.

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