Following the Monetary Policy Committee (MPC) meeting held on December 5th 2023, the Central Bank of Kenya (CBK) has raised the benchmark lending rate from 10.5% to 12.5% percent in yet another attempt at containing the devaluation of the local currency against the US dollar.
As a result of the devaluation opf the shilling, debt servicing costs have increased for the country while the price on imports increases as well. According to the MPC, the exchange rate depreciation continues to exert upward pressure on domestic prices thereby increasing the cost of living and reducing the purchasing power. According to CBK Governor Kamau Thugge, of the overall inflation of 6.8% in November 2023, the exchange rate depreciation was responsible 3.0 percentage points.
“The public sector external debt service has witnessed an increase, offsetting some of the gains made towards the government’s strong fiscal consolidation. Therefore, the move to increase the benchmark rate is an effort to address the pressures on the exchange rate and mitigate second round effects including from global prices,” he said.
The increase is set to see a disruption in access to credit. Already commercial banks have been increasing interest rates, whith many even paying rates of upto 20% due to their risk of defaulting. This has seen many Kenyans miss out on credit. The situation is only likely to get worse now as the increase in benchmark rate is set to see banks increase their rates once more.
The current increase in the Central Bank Rate (CBR) marks the third time the CBK has increased it this year. This was the largest increase in CBR since 2011, when CBK increased the rate by 5.5 percentage points from 11% to 16.5%. Prior to the increase, bankers had adviced to keep the rate unchanged as they had since June.
This increment comes at the worst time possible as the country is currently facing a high cost of living that is affecting most Kenyans. The move is set to affect economic growth negatively as borrowing cost will increase while many are cut off from access to credit. this will eventually lead to cutting costs, layoffs and worse off bsuinesses closing down leading to the unemployment crisis worsening.
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