Central Bank seen raising benchmark rate to 5-year high in 2023

The Central Bank of Kenya (CBK) is being tipped to gradually hike benchmark lending rates and close the year at 9.5 percent, complicating the government’s push for cheap credit.

Standard Chartered analysts said in the outlook for the year that CBK will slow the pace of rate hikes as inflation comes under control but the rate will close at about 9.5 percent compared with the current 8.75 percent. At 9.5 percent, the Central Bank Rate, which is key in signalling the price of commercial bank loans, will have hit levels last seen in May 2018.

Eva Wanjiku Otieno, the principal Africa strategist at StanChart, says CBK is likely to keep the hikes at about 0.25 percentage points per review.  “We are likely to continue seeing more hikes but the pace of the rate hikes is going to slow down as inflation starts to come off. We expect more hikes to come through in 2023, about 75 basis points in total, but 25 basis points at a time,” said Ms Otieno.

The 75 basis point rise will be a slower pace than last year when the CBK raised the rate by 175 basis points to close at 8.75 percent as inflation breached the targeted range of between five percent and 7.5 percent. A further rise in benchmark rate looks set to increase the price of loans at a time banks are implementing risk-based pricing after the interest-rate caps were dropped.

“The rate hikes will squeeze borrowers and even possibly reduce demand for credit. But CBK has to hike the rate to tame inflation,” said Ms Otieno.

The CBK Monetary Policy Committee is expected to meet next Monday with inflation having stayed above the targeted range for seven months running. The regulator last year raised rates thrice, mirroring what was being witnessed globally. The US Federal Reserve mid-December increased its benchmark interest rate to the highest level in 15 years.

Kenya’s inflation rose for eight consecutive months to 9.6 percent in October before cooling off to 9.5 percent and 9.1 percent in November and December respectively.

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