Banks call on CBK to raise lending rate ahead of MPC meet

NAIROBI, Kenya May 25-The Kenya Bankers Association(KBA) has called on the Central Bank of Kenya to raise the base lending rate from seven per cent in the next monetary policy meeting to avert higher inflationary pressures in the country’s economy.

According to a research note prepared by the Association, the move will act as a short-term macroeconomic stabilization tool supporting the country’s economic recovery.

KBA noted that in raising the lending rate, CBK would signal a tightening of financial conditions, ease the exchange rate weakening and avert more macroeconomic instabilities in the short term.

The association noted that the upward inflationary pressure in the country has continued to build upon account of, rising oil and food prices, as well as the direct impact of a weaker currency via imported inflation.

“The need to rein in on inflationary expectations, particularly coming from the expected knock-on effects of rising oil prices on the prices of virtually all other commodities, should capture the attention of policymakers implementing forward-looking monetary policy,” said KBA.

Overall inflation has been on an upward trajectory since December 2021 when it stood at 5.8 per cent to 6.5 per cent in April 2022, according to the Kenya National Bureau of Statistics (KNBS).

This has been driven primarily by higher fuel inflation that edged up from 5.8 per cent in March to 8.5 per cent in April- reflecting the successive April upward pump price adjustments by the Energy and Petroleum Regulatory Authority (EPRA).

Further, the Association noted that raising the rate will boost credit extension to the private sector, and support the fragile economic recovery as it will allow effective pricing of risk.

“The ongoing challenge that has kept banks’ lending rate somewhat unchanged  is associated largely to the lenders’ inability to effectively price risk amidst the elevated credit risk,” it said

KBA warned that failure to effect this will risk calling for a higher magnitude raise in the policy rate in the near future with its attendant effects of market instabilities.

The Central Bank of Kenya retained the base lending rate at seven per cent for the 13th time in a row in March.