The Central Bank of Kenya (CBK) increased the basic lending rate from 7.5% to 8.25% due to persistent inflationary pressures and increased global threats.
The top bank stated that it chose to increase the rate to curb the economy’s spiralling inflation.
The increase of 75 basis points for Kenyan borrowers means increased borrowing costs. The measure is also consistent with most analysts’ projections that the MPC would take action to reduce the inflation rate.
- The Central Bank of Kenya (CBK) increased the basic lending rate from 7.5% to 8.25% due to persistent inflationary pressures and increased global threats
- The increase of 75 basis points for Kenyan borrowers means increased borrowing costs.
- Despite decreased agricultural performance and sluggish global growth, the economy is anticipated to remain resilient throughout the balance of 2022
The Monetary Policy Committee (MPC) met on September 29, 2022, against significant international uncertainties, volatile financial markets, a weaker growth outlook, persistent inflationary pressures, geopolitical tensions, the lingering effects of the COVID-19 (coronavirus) pandemic, and global response measures.
The MPC evaluated the impact of its prior judgments and the efforts put in place to reduce the negative economic consequences and financial disruptions.
“The Committee highlighted the continued inflationary pressures, higher global uncertainties, and their possible impact on the home economy and determined that there was space for monetary policy tightening to anchor inflation expectations further,” the CBK stated.
Since May 30, the CBR has been steady at 7.5 per cent. Previously, the apex bank had kept the rate at 7% until April 2020, accommodating the economy disrupted by the Covid-19 outbreak.
Kenyans faced the steepest spike in living costs in August, when inflation reached an all-time high of 8.5% due to a failing corn flour subsidy, increasing fuel costs, and a weakening shilling.
CBK anticipates that overall inflation will continue to elevate in the short term, partly due to the reduction of government price support measures, which will result in higher fuel and power costs, the impact of tax changes in the FY 2022/23 Budget, and global inflationary pressures.
Sectors with strong growth
The Kenyan economy’s leading indices of economic activity show ongoing solid growth in the second quarter of 2022, according to CBK, with strong activity in storage and transport, retail and wholesale trade, construction, information and communication, and lodging and food services.
“Despite decreased agricultural performance and sluggish global growth, the economy is anticipated to remain resilient throughout the balance of 2022,” CBK added.
Goods exports have been strong, increasing by 11.0 per cent in the year to August 2022 compared to the same time in 2021.
Imports of products climbed by 21.4 per cent in the year to August 2022, compared to 10.2 per cent in August 2021, owing primarily to increasing oil and intermediate goods imports.
The banking system remains robust and resilient with high capital adequacy ratios and liquidity. In August 2022, the proportion of gross non-performing loans (NPLs) to gross loans was 14.2 per cent, down from 14.7 per cent in June.
The market perceptions survey report
The CEOs Survey and the Private Sector Market Perceptions Survey, conducted before the MPC meeting, revealed increased confidence about business activity and economic development forecasts for 2022.
Positive sentiments and revived investor confidence following the end of the elections, increased company activity post-election, and expected new government policies all contributed to the optimism.
Nonetheless, respondents were apprehensive about domestic and international inflation, energy costs, terrible weather, and the ongoing conflict in Ukraine.
The Agriculture Sector Survey, done before the meeting, found that prices of several food items, particularly vegetables, had decreased because of increased supply due to improving weather conditions and the start of the harvest season.
Furthermore, respondents anticipate an increase in agricultural output during the upcoming harvest season.
Nevertheless, respondents listed travel expenses due to the rise in fuel prices, poor weather conditions, and the cost of inputs such as fertilisers and seeds as important factors constraining agricultural productivity.
The Committee will closely assess the effects of the policy measures and developments in the world and domestic economies. It will be prepared to take additional actions if necessary. The Committee will reconvene in November 2022 but is prepared to meet sooner if necessary.