Why CBK’s interest rate increase may not be so bad

The Central Bank of Kenya. PHOTO | FILE 

By SCOTT BELLOWS

In Summary

• Most of the world’s currencies depreciated against the dollar over the past 12 months. Kenya does not subsist as an outlier.
• If global currencies depreciate against the US dollar, why must we in Kenya feel scorn at the CBK and the government when the issue revolves more on the strength of America’s economic recovery rather than any problems here at home?

Borrowers with variable rate debt groaned a collective disgruntled sigh at the Central Bank of Kenya’s action last week when it raised the benchmark interest rate to 10 per cent.

Debtors of all stripes seeking mortgage, automobile, business, or other financing all must pay more for any loan tied to CBK’s benchmark rate.

Further, university classrooms across the nation buzzed with student questions regarding the expected effects of the interest rate increase: why do central banks typically raise interest rates?

So in honour of lender cheers and borrower agony, let us postpone the Business Talk mini-series on job hunting and interviews to focus on CBK rates.

In unpretentious terms, central bank roles usually encompass four main functions, among many ancillary responsibilities.

First, governments usually task central banks to promote economic growth. Second, control inflation. Third, cultivate a robust banking sector. Fourth, foster a stable exchange rate.

When a central bank raises its benchmark interest rate, it often desires one or both of two of the above mentioned primary affects: lower inflation and strengthen the currency.

Since Kenya’s inflation rate does not alarmingly exceed historical levels at the moment, we investigate together two critical questions: should Kenyans feel overly concerned about the shilling’s depreciation and does the CBK rate increase help or hurt the situation?

Many Kenyans fear that the shilling may cross the psychological boundary of 100 units to the dollar like it did in 2011. The fact that our shilling fluctuated 13.2 per cent in its value against the US dollar during the previous 12 months with its strongest value at 87.38 and its weakest point hitting 98.92 bothers much of the population.

However, we first must investigate whether the shilling’s depreciation exists as an isolated event.

In fact, most of the world’s currencies depreciated against the dollar over the past 12 months. Kenya does not subsist as an outlier.

So if global currencies depreciate against the US dollar, why must we in Kenya feel scorn at the CBK and the government when the issue revolves more on the strength of America’s economic recovery rather than any problems here at home with our typical economic fundamentals?

The euro, Canadian dollar, the yen, British pound, as well as the Ugandan and Tanzanian shillings have all depreciated markedly against the US dollar over the past 12 months.

So, Kenya is not alone. The story is about the dollar, not really about the Kenyan shilling.

Kenya actually fared well as our currency appreciated against the euro, Canadian dollar, Japanese yen, Ugandan shilling and the Tanzanian shilling while coming in fairly even with the British pound.