Kenya has raised its base lending rate by 50 basis points to tame the rising cost of living.
The increase is likely to push up the cost of credit in the country which currently stands at an average of 14 per cent.
On Wednesday, the Central Bank’s Monetary Policy Committee raised the Central Bank Rate (CBR) from 8.25 per cent to 8.75 per cent, the third time this year.
”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 further tightening of the monetary policy in order to anchor inflation expectations,” CBK said.
In May, the MPC raised the anchor rate by 50 basis points to 7.50 after retaining it since April 2020 to provide an accommodative stance to the economy which suffered disruptions from the Covid-19 pandemic.
In September, the regulator further raised the rate to 8.25 per cent after the country’s inflation went beyond the set ceiling of 7.5 per cent.
Apex banks globally use the interest rates as either a gas pedal or a brake on the economy when needed.
They set the short-term borrowing rate for commercial banks, and the banks pass it along to consumers and businesses.
With inflation running high, they can raise interest rates and use that to pump the brakes on the economy in an effort to get inflation under control.
Last month, the country’s inflation hit a seven-year high of 9.6 per cent up from 9.2 per cent the previous month.
This was attributed to the high cost of food items and petroleum products in the global market. Traders are passing the high import bill due to the local currency devaluation amid-strengthening US dollar.
According to CBK, the global economic outlook has weakened further, reflecting the impact of the rapid tightening of monetary policy in advanced economies particularly the U.S., the ongoing war in Ukraine, and the lingering pandemic-related disruptions, particularly in China.
“Inflation pressures are showing signs of abating in some major economies, but remain elevated mainly reflecting high energy prices and persistent supply chain challenges,” CBK said.
It added that the volatility in global financial markets remains elevated amid significant U.S. dollar strength against major currencies and the recent rapid changes in policy stance in advanced economies in response to inflationary pressures.
Early this month, the US Federal Reserve approved a fourth consecutive three-quarter point interest rate increase and signalled a potential change in how it will approach monetary policy to bring down inflation.
The country’s apex bank raised its short-term borrowing rate by 0.75 percentage point to a target range of 3.75 per cent-4 per cent, the highest level since January 2008.
The move continued the most aggressive pace of monetary policy tightening since the early 1980s, the last time inflation ran this high.The country’s inflation is at a nearly 40-year high.
This has seen the US dollar strengthened by 12 per cent in just a year, showing weaker currencies like the Kenyan shilling that has dropped eight per cent since January.
Yesterday, it traded 122.18 units against the greenback.
The MPC on Wednesday said it will closely monitor the impact of the policy measures, as well as developments in the global and domestic economy, and stands ready to take additional measures, as necessary.
The committee’s next meeting is in January but it can reconvene earlier if necessary.
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