Nairobi Star (Nairobi)
James Mbugua
2 December 2011
The Central Bank of Kenya yesterday raised its key lending rate by 150 basis points to its highest ever level of 18 per cent.
Persistent inflation driven by the amount of credit available to the private sector and the threat of the euro zone crisis to the stability of the shilling was cited for the rate hike. “The Committee noted that since inflation continued to rise in November and other policy measures, including the Cash Reserve Ratio raised in the last Mpc meeting were still transmitting through the market, it was necessary to enhance these monetary actions,”
CBK governor Njuguna Ndung’u said in a press statement after the meeting. “The Committee therefore decided to revise upward the Central Bank Rate by 150 basis points from 16.5 per cent to 18.0 per cent.” This means the MPC over the last three sittings has raised its lending rate by 11 per cent effectively doubling it.
Previously, it raised the rate by 550 basis points to 16.5 per cent and before that by 400 basis points to 11 per cent. The policy making body noted that while inflation rose in the month of November to 19.72 per cent from October’s 18.9 per cent, the rate of increase had slowed.
However, it said, the effect of the tightening is yet to impact fully on inflation. The Committee noted banks were responding to the rate increases by raising their base and effective lending rates thus dampening households appetite for credit. It also noted that others were in negotiations with their clients to avoid defaults occasioned by higher interest rates.
Further, in support to the shilling, the MPC observed that some banks were offloading some of their foreign currency holdings as the dollar continued to weaken against the local currency. By releasing hard currency to the market, these banks are effectively shoring up the shilling. The MPC statement was in line with observations made by the International Monetary Fund which has called for tighter monetary policy.
IMF feels in particular the expansion of credit to the private sector has not been going to productive sectors. Instead it has been going to consumption. Since March, the MPC has been tightening monetary policy to stabilise the shilling and curb inflation. Banks which had held out on raising lending rates now have hiked them to levels not seen since 2002.
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