Puzzling state move amidst unyielding high cost of living

Last week, the Central Bank of Kenya (CBK) raised interest rates for the fourth time in eight months, increasing the central bank rate by 75 basis points to 9.5 per cent. This means loans will be more expensive. In the language of the CBK, the “further tightening of the monetary policy (is) in order to anchor inflation expectations”.

In English, they are raising interest rates in order to control inflation. That is, government is making money (which we don’t have), more expensive to make us borrow less, in order to bring down the price of food, which we don’t have and can’t afford! Sounds confusing? It is. So, let us unpack it.

Roughly speaking, inflation is seen as too much money chasing too few goods. This will sound like an insult to long-suffering Kenyans who have no money to put food on the table. And we are suffering. A TIFA survey also released last week found that one in five Kenyans often sleeps hungry, and 29 per cent sleep hungry once in a while. But, of the factors that cause inflation, drought, price of petrol and other imports, exchange rate, and amount of money Kenyans have to spend, the bank can influence only the money supply and exchange rate. Of course, the rest of government can take other measures to counter the effects of drought and high oil prices.

Which money supply is the CBK controlling? Credit to private sector. In February, private sector credit grew 11.7 per cent. Analysed by sector, manufacturing grew by 15.2 per cent, transport and communication (16.5 per cent), trade (11.8 per cent), and consumer durables (12.4 per cent). Loan applications and approvals declined, however, indicative of reduced demand. And it is this demand that the CBK wishes to reduce even further, by increasing interest rates.

Oil and food prices

But what exactly was driving inflation in January and February? Higher food prices. Overall inflation increased to 9.2 per cent in February 2023 from 9.0 per cent in January.

The main drivers were higher prices of food and fuel. Food inflation rose to 13.3 per cent in February from 12.8 per cent in January, due to increases in the prices of vegetables. Vegetables were more expensive because January and February were dry months.

Fuel inflation was high at 13.8 per cent in February, because of the government’s removal of the fuel subsidy and increases in electricity prices due to higher tariffs. The opposition has severely criticised both actions. The government has maintained it will not support the consumption side, favouring instead a longer-term measure of subsidised fertiliser.

The CBK expects “overall inflation to remain elevated in the near term, partly reflecting further increases in electricity prices”. The long rains will, however, moderate food inflation in the coming months. Because of the “sustained inflationary pressures”, the CBK decided to raise the Central Bank Rate (CBR) from 8.75 per cent to 9.50 per cent.

In sum, dry conditions, removal of fuel subsidy and hiking of electricity tariffs have increased the cost of living, making it necessary for government to increase interest rates in order to contain the increase in the cost of living!

You could not make it up! In the weekly treasury bond issue that closed last Thursday, the National Treasury offered a Sh20 billion ten-year bond. The market was only willing to lend them 3.6 billion at 14.366 per cent interest rate!

What is the market saying? We can see you will have to increase interest rates further, so we are going to avoid your long-term bonds, unless you are willing to pay us a much high rate!

In the meantime, cost living remains high.

@NdirituMuriithi is an economist