The Central Bank of Kenya (CBK) has raised the benchmark lending rate to the highest level in nearly seven years, signalling costly loans as lenders raise borrowing costs.
The bank’s Monetary Policy Committee (MPC), the top-decision-making organ tasked with stabilising prices, lifted the central bank rate (CBR) by one percent at a surprise MPC meeting, chaired by new CBK governor Kamau Thugge, on Monday to 10.5 percent from 9.5 percent on heightened fear of a spike in consumer prices or inflation.
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The policy rate is the highest since July 2016. It is also the highest in nearly eight years since July 2015 when the CBR rose by 150 basis points at the time.
The MPC Monday said it had noted sustained pressure on inflation and observed risks for greater consumer prices, which in its view would have a negative impact on the domestic economy.
“Overall inflation is expected to remain elevated in the near term, mainly due to the recent increase in electricity prices, the removal of the fuel subsidy, and associated second-round effects. Additionally, a mini-survey of the agriculture sector conducted in the first half of June revealed that prices of some key food items, particularly sugar and maize, remain elevated,” the CBK said in a statement.
Banks use a base rate, which is normally the cost of funds, plus a margin and a risk premium, to determine how much they charge a particular customer.
The lenders largely use the CBR as the base rate when revising the risk premium in what will now increase the cost of borrowing.
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