Borrowers hard hit as CBK raises benchmark lending rate to 16.5pc

Kenyans should brace themselves for higher interest rate following Central Bank’s decision to surprise the market with a 5.5 percentage point hike on its benchmark rate.

Last month it raised the CBR by 4 percentage point to 11 per cent forcing banks to increase their minimum interest rate to between 19 and 20 per cent.

Announcing decision on Tuesday, the Monetary Policy Committee (MPC)—the policy decision making arm of CBK said raising the CBR to 16.5 per cent is expected to stem inflation that shot to 18.91 per cent in October.

Discourage borrowing

If the banks maintain the same spread of 9 percentage points, between CBR and the minimum lending rate, it means that commercial banks are likely to charge their best paying customers over 25 per cent, with those taking personal loans expected to pay over 30 per cent.

The rate could go higher with the committee having raised the cash reserve ratio of commercial banks by 50 basis points to 5.25 per cent, effective from December 15.

The decision is expected to discourage borrowing, which has been blamed for increasing the amount of money in circulation and therefore fuelling inflation.

“The MPC Market Perceptions Survey conducted in October 2011 showed that the private sector continues to expect high inflation to persist over the remainder of the year.

“Going forward, monetary policy has to reverse these expectations through further tightening that will bring inflation and inflationary expectations under control and stabilise the exchange rate to protect the economic growth base,” said a statement by the policy setting committee.

Threatening expansion

The MPC also increased the Cash Reserve Ratio (CRR) by 50 basis points to 5.25 per cent effective from 15th December, to allow commercial banks adequate time to adjust.

The rate hike now brings closer the reality of defaults and bad debts while threatening expansion in companies.

In its statement, the MPC said the move was necessary to protect the country’s economic recovery and macroeconomic stability that was under threat from a weakening shilling and rising cost of living.

“The information provided to the Committee showed that both inflationary pressures resulting from accelerating growth of private sector credit and exchange rate volatility threaten the economic recovery and macroeconomic stability,” the policy setting committees said.

The committee also directed that all Central Bank market operations will henceforth be based on the CBR in order to enhance clarity and certainty.

Analysts argue that the move will be counter-productive in the long term as it will discourage borrowing, which is critical in growing businesses and creating jobs.

Kenya’s traditional source of dollars has been agricultural cash crops such as coffee, tea and horticulture.

But these have been affected by the drought, leading to low production.

At the same time, the drought has led to importation of the country’s staple food, maize, piling pressure on the currency.