Central Bank’s lending rate increase ill-advised, say MPs

Parliament has dismissed the Central Bank’s decision to increase interest rates to curb inflation saying the move was “highly misadvised”.

In a paper published on Tuesday by the Parliamentary Budget Office, the MPs are of the view that the policy of raising interests is punitive.

Such a move should only be used when the economy is highly mismanaged or when there are bank failures.

“We believe that there are alternative measures to dealing with the problem of high inflation and weak shilling away from the use of harmful measures such as sharp interest rate increases,” the economists in Parliament said.

Parliamentary Budget Office is chaired by Rangwe MP, Martin Otieno Ogindo, whose role is to provide timely and objective information and analysis concerning the national budget and economy.

In the statement, the MPs say Central Bank of Kenya may have no idea when to stop increasing the rates.

This is so because of the frequency at which they are adjusting the lending rates even without waiting for the results of their move to show on the inflation and the depreciation of shilling that had dogged the country in November this year.

The CBK unexpectedly raised the Central Bank Rate to 16.5 per cent on November 1, 2011 up from 11 per cent, then again to 18 per cent after exactly one month.

Labour union pressures

The MPs now want the Governor, Prof Njuguna Ndung’u and his monetary policy team to tell the country “the real cost” of giving up economic growth in favour of taming inflation.

“Is the country ready to pay the price of falling growth, high unemployment, rising labour union pressures, poverty, inability of government to borrow for its operations, high loan defaults and bank weaknesses?,” the Parliamentary Budget Office note in their paper.

The House experts have warned that if the CBK continues to pursue the rise in interest rates to curb inflation and mop up the extra money in the economy, then the country should be ready for tougher times.