Interest on loans set to increase as CBK raises benchmark rate

The Central Bank of Kenya (CBK) on Tuesday raised the benchmark interest rate to 10 per cent from 8.5 per cent, setting the stage for a rise in the cost of loans in the coming months.

The CBK’s monetary policy committee (MPC) said it took the action after noting that increased demand for goods and services had pushed up prices — and combined with a weakening shilling – had the potential to destabilise markets.

The shilling has in the past couple of weeks weakened to its lowest level against the US dollar in more than three years, pushing the overall inflation rate close to the 7.5 per cent medium term ceiling set by the treasury.

The rise in the benchmark rate, also known as the Central Bank rate (CBR), has the effect of raising the cost of funds for commercial banks, who are expected to pass it on to the borrowers in the form of higher lending rates.

Lending rates have been stable at an average of 15.4 per cent in the past 12 months, having dropped from 16.91 per cent last July.

It is the first time since April 2013 that the monetary policy committee has changed the CBR.

The policy rate stood at 9.5 per cent in March 2013, having been initially set at that level in January of the same year.

It then dropped to 8.5 per cent in April 2013, where it remained for 26 months.