CBK’s decision to hike lending rate ill-timed

The Central Bank of Kenya in Nairobi. FILE PHOTO | NMG    

By BUSINESS DAILY More by this Author

The move by the Central Bank of Kenya (CBK) to increase the benchmark lending rate by a percentage point to 10.50 percent, the highest level since 2016, has come at the

wrong time.

Kenyans have been battling financial problems, including a sharp rise in the cost of basic items amid stagnant wages and a freeze in hiring.

The doubling of fuel tax and the new housing levy from Saturday will further strain the already squeezed incomes and raise business costs.

Therefore, any action that will raise the cost of borrowing would not come at the worst time. The jumbo rate hike aims to ease demand for credit, hoping to cool inflation.

But inflation in May was driven higher by food and fuel prices, keeping the rate outside the government’s preferred upper limit of 7.5 percent.

This indicates that our inflation is supply, not demand-driven, where cash is chasing after a few goods.

What Kenya requires is a drop in food and fuel prices.

We doubt if making costly loans will drive inflation to the desired levels below the upper range of 7.5 percent through a curb in consumer spending.

The market trends last year back our position.

Despite raising the benchmark rate more than twice and by higher margins under the former Central Bank of Kenya governor Patrick Njoroge, inflation remained outside the preferred range of 2.5-7.5 percent since last June.

Increased food supply as we approach the harvest season and lower fuel due to conditions in the global market are the panacea to lower inflation, not costly loans.

Costly food and fuel due to the worst drought in 40 years and Russia’s war in Ukraine pushed inflation from 7.1 percent in May.