Kenyans To Pay More For Loans As CBK Raises Base Lending Rate To 12.5% On Declining Shilling

• The Central Bank of Kenya (CBK) increased the base lending rate from 10.5% to 12.5% in December 2023
• This followed a relatively high inflation rate of 6.8% reported in November 2023, caused by high fuel and food prices
• CBK governor Kamau Thugge said the move to tighten monetary policy is aimed at reducing pressure on the shilling, which also exacerbates inflation

TUKO.co.ke journalist Wycliffe Musalia brings over five years of experience in financial, business, and technology reporting, offering deep insights into Kenyan and global economic trends.

Kenyan borrowers will have to dig deeper into their pockets to access loans.

The Central Bank of Kenya (CBK) increased the base lending rate to 12.5%, up from 10.5%.

Why CBK raised the interest rate

The CBK Monetary Policy Committee (MPC) adjusted the monetary policy to address pressure on the Kenya shilling and mitigate the second-round effect of global prices.

The committee chaired by CBK governor Kamau Thugge said it expects inflation to be further reduced to 5% mid-point of the target range.

"This will ensure that inflationary expectations remain anchored while setting inflation on a firm downward path towards the 5% mid-point of the target range. Therefore, the MPC decided to raise the Central Bank Rate (CBR) to 12.5%," said Thugge in a press release on Tuesday, December 5.

The regulator's report indicated that the Kenya shilling traded at KSh 153.3 against the US dollar.

The MPC noted that the continued depreciation of the shilling exerts pressure on domestic prices, increasing the cost of living and reducing purchasing power.

Is Kenya's inflation easing?

Kenya's inflation remained relatively high at 6.8% in November 2023, 1.8% points above the CBK expectations.

"Of the overall inflation of 6.8% in November 2023, the exchange rate depreciation contributed 3% points," he said.

Kenya National Bureau of Statistics (KNBS) reported that the rising cost of fuel and other items drove the rate.

Transport costs increased by 13.6%, with electricity, gas, and other fuels reporting an increase of 8.5%.

Are banks winning from the CBK rate?

The MPC report further noted that commercial banks remain stable and resilient with strong liquidity and capital adequacy ratios.

Gross non-performing loans (NPLs) to gross loans stood at 15.3% in October 2023 compared to 15% reported in August 2023.

Private sector credit growth was stable at 12.5% in October and 12.2% in September 2023.

In an exclusive interview with TUKO.co.ke Daniel Kathali, an economist and lecturer at Mt. Kenya University, explained that ordinary Kenyans can no longer take loans with the rising rates.

"The negative impact of high-interest rates in an economy is that it discourages borrowing because the borrowers end up paying more for the money.

"The ordinary Consumer is a net spender, higher interest rates will therefore pull back their spending, and this slows down economic activities," said Kathali