Several banks, including Co-operative Bank, Equity Bank, and NCBA Bank, have decided to raise their lending rates in alignment with the Central Bank of Kenya (CBK). This move comes after CBK’s Monetary Policy Committee (MPC) recommended an increase in the base lending rate from 9.5 percent to 10.5 percent.
The recent adjustment aims to address the rising inflation, which climbed to eight percent in June, up from 7.9 percent in May, as reported by the Kenya National Bureau of Statistics (KNBS). In order to curb inflationary pressures, the committee implemented the rate hike.
Co-operative Bank, as the latest financial institution to adjust its interest rate, announced that its new Base Lending Rate for Kenya shilling credit facilities will now be 13% per annum starting from August 7, 2023. This change follows the initial rate hike by Equity Bank, which increased its rate to 13 percent. Subsequently, NCBA Bank also raised its rate from 10.5 percent to 13 percent.
Consequently, the cost of acquiring loans will rise, impacting borrowers who will now face higher expenses in servicing their debts.
Over the past 18 months, central banks in emerging markets have implemented robust measures to curb inflationary pressures amidst the backdrop of a resilient U.S. dollar and its relative strength against their respective local currencies. These emerging market central banks have pursued a proactive approach by adopting aggressive monetary policy tightening.
Kenya’s approach to policy in the continent has been somewhat less strict, even though inflation has been persistently high. In February, inflation increased to 9.2% per year, up from 9.0% the previous month, mostly because of higher prices for food and transportation.
Central banks around the world utilize interest rates as a tool to either stimulate or restrain the economy as necessary.
The central bank establishes the short-term borrowing rate for commercial banks, which is then transmitted to consumers and businesses through the banks.
In times of elevated inflation, the central bank has the ability to increase interest rates. This tool allows them to apply brakes to the economy, aiming to rein in inflation and regain control over it.
Inflation pressures are showing signs of abating in some major economies but remain elevated mainly reflecting high energy prices and persistent supply chain challenges.
Early this month, the US Federal Reserve approved a fourth consecutive three-quarter point interest rate increase and signaled a potential change in how it will approach monetary policy to bring down inflation.
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