Listen to This Article Enhance your reading experience by listening to this article.

The cost of borrowing could rise further as analysts predict Central Bank of Kenya (CBK) is poised to increase its base lending rate by a further 0.5 per cent to cushion the economy from runaway inflation.

Projections by economists at ICEA Asset Management ahead of the regulator’s Monetary Policy Meeting (MPC) signals an even higher interest rate regime, barely three months after a similar review by the CBK monetary committee was done in May.

“In line with the trend internationally, the MPC is expected to further raise the Central Bank Rate by 0.5-1 per cent during its meeting later in July,” offered ICEA’s George Kamau, a Senior Portfolio Manager at the firm.

“Transmission of this policy to the real economy will however be subject to the cash-based nature of the economy and the cost-push nature of inflation in Kenya,” Kamau said.

When rates rise, commercial banks increase their interest rates, which in return discourage borrowers from seeking credit facilities to finance projects, leading to slower economic growth.

The MPC was compelled to review benchmark lending rate to 7.5 per cent two months ago due to the rising inflationary pressures, making it the first hike since July 2015.

Lenders to increase rates further

Already, lenders have increased the cost of lending as a message forwarded from HFC confirms: “Dear customer, in line with the Central Bank Rate increase of 0.5 per cent to 7.5 per cent, interest rates on all Kenya shilling loans disbursed from 2020 to date will increase by 0.5 per cent per annum effective 8th August 2022.”

Should the CBK hike the rates again, it will force lenders to increase their rates further, worsening the situation in the short term. During ICEA’s Tuesday investor briefing for the third quarter review, the firm’s analysts cited global recession concerns brought by the Russian-Ukraine war, rising inflation, supply chain disruption and geopolitical tensions as well as last week’s resignation by the UK’s premier Boris Johnson as some of the happenings that could lead to CBK’s move with the looming August 9 polls to also play a part.

“Currently the world is grappling with a possible global recession emanating from stifled demand, rising inflation, supply chain disruption and geopolitical tensions. This coupled with domestic challenges of poor rainfall and political uncertainties, puts further pressure on investors to preserve their capital,” says ICEA experts.

Inflation – which is the rate at which the value of a currency is falling and, consequently, the general level of prices for goods and services is rising, has continued to build up on account of rising oil prices.

The Kenyan Shilling against the US dollar exchange rate transacted at Sh118.20 at the opening of NSE -trading yesterday in what has been a consistent but perturbing dip in its value against major currencies.

“Inflationary expectations are not well anchored. 

There is a need to tighten monetary policy stance to rein in inflationary expectations,” noted a research communication by the Kenya Bankers’ centre.

Predictions by Bloomberg and Fitch Solutions, also indicate that such rates will hit 8.10 percent and 8.0 per cent respectively by the year end.

“The committee will closely monitor the impact of the policy measures, as well as developments in the global and domestic economy, and stands ready to take additional measures as necessary. But MPC remains ready to re-convene earlier if necessary,” noted CBK’s Governor Patrick Njoroge in the last MPC meeting in March.