Central Bank of Kenya has raised interest rates from 12.5 percent to 13 percent to prevent further weakening of the Kenya shilling against the dollar.
In a statement, the Monetary Policy Committee (MPC) chaired by Central Bank Governor Dr. Kamau Thugge observed that there was an overall inflation of key components -food, fuel, non-food non- fuel (NFNF)-which rose to 7.9, 14.3, and 3.6 percent respectively in January 2024.
The committee explained that the new interest rate would see more investors coming into the country to invest and expressed a good return, something that could help in stabilizing the Kenya shilling.
“The proposed action will ensure that inflationary expectations remain anchored while setting inflation on a firm downward path towards the 5 percent mid-point of the target range, as well as addressing the residual pressures on the exchange rate. The Monetary Policy Committee therefore decided to raise the Central Bank Rate from 12.50 percent to 13 percent, ” the statement read in part.
How will increased interest rates affect businesses?
The hike, which started last year in June when it hit 10.50 percent just an increase of 50 basis points from 9.50 percent as a result of non-performing loans in the banking sector, will now subject borrowers to more pain which could negatively affect businesses.
The cost of borrowing will now go up and automatically lead to high loan interest rates and credit facilities.
However, the move will promote savings and investment since more consumers will not want to spend.
The new rate is an indication that CBK has leverage to control inflation since the cost of borrowing has become expensive which would eventually lead to a slowdown of economic activity and stop the economy from experiencing an overheat.
As the Monetary Policy Committee seems to have ignored the Kenya Bankers Association’s prayer for interest rates to remain at 12.50 percent, businesses and consumers will have to adjust to match the new rate.
The Kenya Bankers Association had earlier stated,
“Easing inflationary pressure calls for a hold on the CBR to allow its recent adjustments to be fully transmitted through the market and protect the fragile economic activity.”
