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What to expect after CBK hikes interest rates to highest level in 11 years

With the raising of the Central Bank Rate, CBK aims to mitigate further depreciation of Kenya's currency.

CBK Governor Kamau Thugge during a meeting in Nairobi

Central Bank of Kenya (CBK) announced an increase in the Central Bank Rate (CBR) from 10.50 percent to 12.50 percent following the Monetary Policy Committee (MPC) meeting on December 5, 2023.

The last time the Central Bank Rate was above 12% was in September 2012 (13%)

This move carries far-reaching implications for the Kenyan economy and its citizens.

In this comprehensive explainer, we delve into what this decision entails and how it may impact the lives of ordinary Kenyans.

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Before dissecting the implications of the rate hike, let's briefly revisit the role of the benchmark rate.

The benchmark rate, or Central Bank Rate (CBR), is a crucial tool used by the CBK to influence economic activity by adjusting the cost of borrowing.

When the CBR rises, it becomes more expensive for banks to borrow money from CBK, leading to higher interest rates for consumers and businesses.

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The decision comes against the backdrop of persistent global uncertainties, volatile international oil prices, weak global growth, and escalating geopolitical tensions.

Impact on Borrowing Costs

One immediate effect of the rate hike will be the increase in borrowing costs across the board.

Whether you're considering a mortgage, personal loan, or business financing, higher interest rates mean larger monthly repayments.

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This could potentially slow down borrowing and investment activities, affecting both individuals and businesses.

"Increases in non-perfoming loans were noted in the manufacturing, trade, personal and household, building and construction, and transport and communication sectors," CBK noted.

A non-performing loan is a bank loan that is subject to late repayment or is unlikely to be repaid by the borrower in full.

Government Debt Servicing

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The government, being a significant borrower, will face increased costs in servicing its debt.

This could have implications for fiscal policy and government spending. Citizens may witness changes in public services or development projects as the government adapts to the new economic landscape.

Inflation Control

The CBK noted that Kenya's overall inflation remained at 6.8 percent in November 2023, compared to 6.9 percent in October, but this is still higher than what the governments target of 5 percent.

One of the primary reasons behind the CBK's decision is to control inflation. By raising interest rates, the CBK aims to reduce spending and investment, curbing inflationary pressures in the economy.

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This move signals a proactive stance against rising prices, safeguarding the purchasing power of Kenyan currency.

Foreign exchange rate dynamics

A higher benchmark rate can influence the exchange rate. The Kenyan Shilling has been depreciating against other currencies.

The MPC noted that exchange rate depreciation continues to exert pressure on domestic prices, thereby increasing the cost of living and reducing purchasing power.

Of the overall inflation of 6.8 percent in November 2023, the exchange rate depreciation contributed about 3.0 percentage points.

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With the raising of the CBR, CBK aims to mitigate further depreciation of Kenya's currency.

Savings and Investments

On the flip side, savers may benefit from higher interest rates as banks offer better returns on savings and fixed deposits.

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This could encourage a culture of saving, which is crucial for long-term economic stability. However, for those with variable-rate loans, the increased interest payments may offset gains from higher savings returns.

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