Lower bank lending rates to ease the cost of living
Last week the Central Bank of Kenya (CBK) raised its benchmark rate for lenders in the country from 8.75 per cent to 9.5 per cent amid struggles to contain inflation. As expected, lenders have responded by adjusting their costs of credit in sync with the move by the apex bank, adding strain on corporates and individuals already squeezed by harsh economic conditions in the country.
The Kenyan situation is not unique and follows after a global cycle of monetary policy tightening which has seen central banks raise interest rates for close to five decades as inflation continues to largely defy expectations.
Historically, developing economies such as Kenya with ample monetary and fiscal policy space—thanks to strong current account balances and anchored inflation—have been able to withstand rate increases in advanced economies. A lot has, however, changed and they now feel a direct hit of the global interest rate raises amid worsening current account balances, low capital in-flows and stubborn inflationary pressure.
The CBK and policymakers should rethink their actions and tackle the immediate threats to inflation, including ensuring sufficient production of food, affordable energy and efficient commodity market and trade systems. Improved agricultural output means plentiful and more affordable food while, for energy, policymakers should accelerate the transition to cheaper clean energy sources while adopting measures for sustainable energy consumption.
Commodity markets should be transformed to an open system devoid of protectionism and fragmentation that may hinder consumers from the benefits of free trade as the government beefs up its fiscal resources by eliminating unwarranted expenditure and fund transfers in programmes with no immediate benefit to urgent matters like food and health.
This would streamline expenditure and limit borrowing. High borrowing substantially exposes a nation to the vagaries of loan refinancing in an environment of costlier interest charges.