Do not stifle economy with expensive loans – Business Daily
The Central bank of Kenya, Nairobi on Wednesday, December 30, 2020. PHOTO | DENNIS ONSONGO | NMG
Kenya’s economy needs affordable credit to recover from the long slump induced by Covid-19 aftershocks, disruptions from the war in Ukraine, drought and an intense electioneering period.
The country’s economic growth slowed to 5.2 percent growth in the quarter ended June, down from a 6.8 percent gain in the previous three months as pre-election jitters and a prolonged drought weighed on output.
Credit growth also dipped to 12.5 percent in the year to August, retreating from a six-and-a-half-year high of 14.2 percent recorded in July on pre-election jitters.
Bankers should look at the bigger picture when reviewing loan rates upward in line with the Central Bank of Kenya (CBK) raising its benchmark interest rate. In advanced economies, raising interest rates helps to cool down the inflation by slowing lending and limiting demand. Kenya’s inflation, which hit 9.2 percent in September from 8.5 percent in August, remaining above the upper limit target of 7.5 percent since June is, however, driven by supply shocks.
Rise in global oil prices and shortages caused by supply chain dislocations have pushed up the prices of domestic goods.
Kenya’s inflation is also being fuelled by state taxes and the depreciating shilling that has increased cost on the country’s imports.
It is unlikely that raising interest rates will tame rising cost of basic goods and might only push the economy into slower growth shrinking incomes and worsening living conditions.
Use of CBR rate to price loans is also minimal as lenders use short term treasuries to gauge the cost of funds.