NAIROBI, Kenya, Sep 29 – The Central Bank of Kenya(CBK) has raised the base lending rate from 7.5 per cent to 8.25 per cent citing sustained inflationary pressures amid elevated global risks.
The apex bank noted that it decided to raise the rate to anchor runaway inflation in the economy.
The increase by 75 basis points signals a higher cost of loans for Kenyan borrowers.
“The Committee noted the sustained inflationary pressures, the elevated global risks, and their potential impact on the domestic economy and concluded that there was scope for a tightening of the monetary policy in order to further anchor inflation expectations,” CBK said in a statement.
The CBR has been maintained at 7.5 percent for four months since May 30.
Before that, the apex bank had retained the rate at 7 per cent from April 2020 providing an accommodative stance to the economy which suffered disruptions from the Covid-19 pandemic.
Kenyans endured the sharpest rise in the cost of living in August when inflation rose to an all-time high of 8.5 per cent, amid a failed maize flour subsidy, rising fuel costs, and a weakening shilling.
CBK expects overall inflation to remain elevated in the near term, due in part to the scaling down of the Government price support measures, resulting in increases in fuel and electricity prices, the impact of tax measures in the FY 2022/23 Budget, and global inflationary pressures.
Leading indicators of economic activity for the Kenyan economy show continued good performance in the second quarter of 2022, CBK notes, supported by robust activity in transport and storage, wholesale and retail trade, construction, information and communication, and accommodation and food services.
“The economy is expected to remain resilient in the remainder of 2022, supported by the services sector despite subdued performance in agriculture and weaker global growth,” CBK said.
Two of the surveys conducted ahead of the MPC meeting, the CEOs Survey and Private Sector Market Perceptions Survey, revealed stronger optimism about business activity and economic growth prospects for 2022.
The optimism was attributed to positive sentiments and renewed investor confidence following the conclusion of the elections, increased business activity post-election and anticipated new government policies.
Nevertheless, respondents remained concerned about domestic and global inflation, energy costs, poor weather conditions, and the continued war in Ukraine.
The Survey of the Agriculture Sector conducted ahead of the meeting, revealed that prices of some food items particularly vegetables have declined due to increased supply with the improved weather conditions and onset of the harvest season.
Additionally, respondents expect agricultural output to improve in the next harvest season. Nevertheless, respondents identified transport costs due to the rise in fuel prices, adverse weather conditions, and the cost of inputs such as seeds and fertilizers as major factors constraining agricultural production.
Exports of goods have remained strong, growing by 11.0 percent in the 12 months to August 2022 compared to a similar period in 2021.
Imports of goods increased by 21.4 percent in the 12 months to August 2022 compared to an increase of 10.2 percent in the 12 months to August 2021, mainly reflecting increased imports of oil and intermediate goods.
The banking sector remains stable and resilient, with strong liquidity and capital adequacy ratios. The ratio of gross non-performing loans (NPLs) to gross loans stood at 14.2 percent in August 2022, compared to 14.7 percent in June.
Growth in private sector credit stood at 12.5 percent in August 2022, compared to 12.3 percent in June.
