CBK Raises Policy Rate to 8.25% to Manage Inflation

The Central Bank of Kenya (CBK) has raised the policy interest rates from 7.5 percent to 8.25 percent to reign in rising inflation and reduce capital outflows due to high-interest rates in the United States.

The bank, however, said the economy remains strong thanks to strong credit growth in the private sector and a recovery in exports and tourism.

“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 its post-Monetary Policy Committee meeting brief.

In view of these developments, the banking sector regulator said MPC decided to raise the Central Bank Rate (CBR) from 7.50 percent to 8.25 percent.

CBK Governor Patrick Njoroge emphasised in his interview with CNN last week that the elephant in the room was the high-interest rates in the United States. 

“I think in the first instance we have to fight strongly against capital outflows,” said Njoroge, who is also the MPC chairman.

Overall inflation increased to 8.5 percent in August 2022 from 8.3 percent in July, due to increases in food and fuel prices.

Food inflation remained elevated at 15.3 percent in July and August, largely due to prices of maize grain and flour, and edible oils and wheat products due to the impact of supply chain disruptions. 

“Overall inflation is expected 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 budget, and global inflationary pressures,” said Njoroge.

He, however, expects the high inflation to be mitigated by falling global oil prices and expectations of harvests in the next one or two months.

This comes amidst elevated bad loans in the banking sector that could further see banks adjust loan rates higher.

The ratio of gross non-performing loans to gross loans stood at 14.2 percent in August 2022, compared to 14.7 percent in June. Repayments and recoveries were noted in the building and construction, manufacturing, transport and communication sectors.

Credit growth in private sector credit stood at 12.5 percent in August 2022, compared to 12.3 percent in June.

Strong credit growth was observed in the following sectors: manufacturing at 15 percent, trade at 13 percent, business services 16 percent, and consumer durables at 14.3 percent.

“The number of loan applications and approvals remained strong, reflecting improved demand with increased economic activities,” the regulator said.

Exports of goods remained strong, growing by 11 percent in the 12 months to August 2022 compared to a similar period in 2021. In particular, receipts from tea and manufactured goods exports increased by 10.9 percent and 20.8 percent respectively during the period.

Banks have been calling on the governor to raise rates to contain exchange rate losses in what will see bond investors majority of which are banks making a killing from high rates on government debt.

CBK said economic activity for the Kenyan economy showed continued good performance in the second quarter of 2022, supported by robust activity in transport and storage, wholesale and retail trade, construction, information and communication, and accommodation and food services.

The Central Bank, however, expects the economy to remain resilient in the remainder of 2022, supported by the services sector despite subdued performance in agriculture and weaker global growth.