CBK raises key lending rate to 8.25pc to curb runaway inflation

 Central Bank of Kenya

The Central Bank of Kenya headquarters, Nairobi.

Photo credit: File | Nation Media Group

The central bank Monetary Policy Committee has raised the base lending rate from to 7.5 per cent to 8.25 per cent, citing elevated pressure from inflation. The modest increase by 75 basis points effectively signals higher cost of loans for Kenyan borrowers.

The move is also in line with the expectations of most analysts who had projected action by the MPC to stem surging inflation.

"The Committee noted the sustained inflationary pressures, the elevated global risks and their potential impact on the domestic economy and concluded that there was scope for a tightening of the monetary policy in order to further anchor inflation expectations. In view of these developments, the MPC decided to raise the Central Bank Rate (CBR) from 7.50 percent to 8.25 percent," it said in a statement Thursday. 

The tightening of liquidity is, however, expected to hurt access to credit for individuals and companies.

The CBR had been static at 7.5 percent for four months since May 30, 2022.

Kenyan consumers endured the sharpest rise in the cost of living in more than five years in August when inflation rose to a 62-month high of 8.5 percent, amid a failed maize flour subsidy, rising fuel costs and a weakening shilling. Inflation is projected to surge further this month after the State made twin raises on the cost of petroleum and electricity.

The rate of inflation was the fastest since June 2017 when it hit 9.21 percent in the run-up to the previous electioneering cycle.

"Overall inflation is expected to remain elevated in the near term, due in part to the scaling down of the government price support measures, resulting in increases in fuel and electricity prices, the impact of tax measures in the FY 2022/23 Budget, and global inflationary pressures," CBK said.

Higher cost of energy

The Energy and Petroleum Regulatory Authority (Epra) mid-this month raised fuel prices by up to 18 percent, with a litre of super petrol rising by Sh20.18 to sell at Sh179.3, that of diesel from Sh140 to Sh165, and kerosene by 15.6 percent to Sh147.94.

The regulator last week also raised the cost of electricity by 15 percent following adjustments on three pass-on costs, including fuel, forex, and inflation adjustments--pushing the cost of a kilowatt hour unit(kWh) to Sh25.3 for domestic consumers who use more than 100 units a month.

In the new price schedule, the regulator raised the fuel cost charge (FCC)-- the single-biggest variable cost that is adjusted monthly--- by a whopping 46.6percent to Sh6.79 per kilowatt-hour (kWh) of electricity up from Sh4.63.

The energy regulator also nearly doubled the Foreign Exchange Fluctuation Adjustment (Ferfa) to Sh1.36 up from 73 cents to cater to the weakening of the Kenyan shilling against the US dollar. This is the first time Epra has adjusted the FCC and Ferfa rates since December.

The move technically cancelled out a 15 percent cut in electricity prices in January this year on the directive of retired President Uhuru Kenyatta.

The raises will have a direct impact on the cost of agricultural and industrial production, transportation, and cost of feeds, all of which will reflect on consumer prices for food and manufactured goods and raise the overall cost of living.

Consumers could find themselves spending over 30 percent of current prices on different products, economic, analysts said.

“The high cost of fuel is expected to increase the cost of production for manufacturers, resulting in more pain for consumers who are already struggling to make ends meet. This is because, the price of fuel cascades across the value chain,” Job Wanjohi, Head of Policy, Research, and Advocacy at the Kenya Association of Manufacturers said.

CBK’s inflation-targeting MPC said the banking sector remains stable and resilient, with strong liquidity and capital adequacy ratios. 

"The ratio of gross non-performing loans (NPLs) to gross loans stood at 14.2 percent in August 2022, compared to 14.7 percent in June. Repayments and recoveries were noted in the building and construction, manufacturing, and transport and communication sectors. Banks have continued to make adequate provisions for the NPLs," it said.