EXPLAINER

Why CBK raised base lending rate

Apex banks globally use the interest rates as either a gas pedal or a brake on the economy when needed.

In Summary
  • Overall inflation increased to 7.1 per cent in May from 6.5 per cent in April, mainly due to higher food and fuel prices.
  • Inflation has hit a 40-year high in several developed countries including the US,  UK and Germany 
The Central Bank of Kenya along Haile Selassie Avenue./FAITH MUTEGI
The Central Bank of Kenya along Haile Selassie Avenue./FAITH MUTEGI

Kenya's cost of living is expected to rise further in the coming months, a move that saw the Central Bank of Kenya hike the benchmark lending rate by 50 basis points. 

Addressing a post-Monetary Policy Committee media briefing, CBK governor Patrick Njoroge said the inflation rate is expected to rise above the government's ceiling of 7.5 per cent in the coming months on the uncertain global supply of basic commodities. 

Latest inflation data by the  Kenya National Bureau of Statistics released on Tuesday placed May Inflation figure at 7.1 per cent compared to 6.5 in April. In May 2021, inflation was at 5.9 percent.

"The high inflation witnessed is supply induced. The accommodative policy is aimed to contain the secondary effects of this,'' Njoroge said. 

Apex banks globally use the interest rates as either a gas pedal or a brake on the economy when needed.

They set the short-term borrowing rate for commercial banks, and the banks pass it along to consumers and businesses.

With inflation running high, they can raise interest rates and use that to pump the brakes on the economy in an effort to get inflation under control.

''Basically, an increased base lending rate aims to make borrowing more expensive so that consumers and businesses hold off on making any investments, thereby cooling off demand and bringing prices back in check,'' an economist George Mudanya told the Star. 

The current high cost of living has been mainly pushed up by higher food and fuel prices.

Food inflation rose to 12.1 per cent in April from 9.9 per cent in March, largely on account of vegetable prices due to seasonal factors, and the impact of global supply chain disruptions on cooking oil prices.

Fuel inflation increased to 8.5 per cent from 5.8 per cent driven by the rise in international oil prices.

''However, this increase was moderated by government measures to stabilise fuel prices and lower electricity tariffs. Additionally, the recent waiver of import duty on maize and subsidies on fertiliser prices are expected to continue to moderate domestic prices,'' CBK said. 

It added that the rising cost of living which is largely driven by Russia - the Ukraine crisis is not accustomed to Kenya only as developed countries like the US, UK and European countries are experiencing the highest inflation rate in 40 years. 

''Global inflationary pressures remain elevated reflecting the impact of the sharp increase in prices of commodities particularly fuel, fertilizer, edible oils, and wheat,'' the regulator said in an MPC statement. 

For instance, inflation has hit 8.3 per cent in the US, the UK at 9.1 per cent and 7.5 per cent in the Eurozone. 

Financial market volatility has also increased significantly amid the recent adjustments in monetary policy in advanced economies.

Early last month, the US Fed raised interest rates by half a percentage point to a range of 0.75 per cent to one per cent as a way of easing the highest since 1981. Further hikes are expected.

Last week, world leaders at the World Economic Forum's annual meeting in the Swiss resort town of Davos came close to declaring a global recession.

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