Cost of loans set to rise as CBK lifts benchmark lending rate to 8.25%

Cost of loans set to rise as CBK lifts benchmark lending rate to 8.25%

  • By lifting the benchmark lending rate, the CBK seeks to stamp on inflation by going after demand while at the same time incentivising investments in Shilling denominated assets after significant portfolio outflows triggered by interest hikes in developed economies.
  • Proponents against interest rate increased had however warned of increased borrowing costs on not just Kenyans but also government.
  • Data from the Central Bank of Kenya (CBK) for instance shows the average commercial bank lending rate moved from 12.22 per cent in May to 12.35 per cent in July to mirror the increased cost of borrowing this far.

The cost of loans is expected to jump sharply after the lifting of the benchmark lending rate/CBR to 8.25 per cent from 7.50 per cent by the CBK.

The Central Bank of Kenya (CBK) says the 0.75 per cent on Thursday is geared at cushioning against increased inflation risks both on the domestic and global scene.

“Overall inflation is expected to remain elevated in the near term, due in part to the scaling down of the government price support measures, resulting in increases in the fuel and electricity prices, the impact of tax measures in the 2022/23 budget and global inflationary pressures,” the CBK said in its post-Monetary Policy Committee press release.

“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 tightening of monetary policy in order to further anchor inflation expectations.”

By lifting the benchmark lending rate, the CBK seeks to stamp on inflation by going after demand while at the same time incentivising investments in Shilling denominated assets after significant portfolio outflows triggered by interest hikes in developed economies.

Analysts in support of a rate hike at the September meeting had for instance argued for galvanizing domestic investments which would in part also ease pressure on the local exchange rate.

Proponents against interest rate increases had however warned of increased borrowing costs on not just Kenyans but also the government.

Average lending rates and short-term domestic debt interest rates for instance were already on the rise off the backdrop of May’s 0.5% rate hike by the CBK which lifted the benchmark lending rate from seven per cent.

Data from the Central Bank of Kenya (CBK) for instance shows the average commercial bank lending rate moved from 12.22 per cent in May to 12.35 per cent in July to mirror the increased cost of borrowing.

Yields on Treasury bills have meanwhile moved up by between 0.4 and 0.9 per cent in the opening half of 2022 to mirror the higher interest rates.

Private sector credit growth has nevertheless defied the rising rates to stand at 12.5 per cent in August compared to 12.3 per cent in June but tapered slightly in July.

At the same time, the ratio of the banking industry's non-performing loans (NPLs) to gross loans has eased to 14.2 per cent in August from a higher 14.7 per cent in June.

“Repayments and recoveries were noted in the building and construction, manufacturing, and transport and communication sectors. Banks have continued to make adequate provisions for the NPLs,” added CBK.

Despite elevated inflation risks, CBK says its survey of CEOs and the private sector market has revealed ‘stronger’ optimism about business activity and economic growth prospects for 2022.

“The optimism was attributed to positive sentiments and renewed investor confidence following the conclusion of the elections, increased business activity post-election, and anticipated new government policies,” CBK said.

The lifting of the benchmark lending rate by the CBK tracks similar actions by Central Banks in developed economies including the US Federal Reserve and the European Central Bank (ECB).

 

 

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Central Bank of Kenya (CBK) Central Bank Rate (CBR) Citizen Digital interest rates

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