Borrowers dealt with a blow as Central Bank Raises Benchmark Lending Rate to 12.5%

The Central Bank of Kenya (CBK) has increased its benchmark lending rate to 12.5%. This marks a 200-basis-point hike from the previous rate of 10.5% and represents the highest lending rate in Kenya since 2017.

The CBK’s decision is primarily driven by concerns over the depreciating Kenyan shilling and the rising cost of debt service. The weakening shilling has fueled inflationary pressures, making imports more expensive and eroding the purchasing power of consumers. Additionally, the increasing cost of servicing external debt, particularly for the public sector, has raised concerns about the country’s fiscal sustainability.

The hike in the benchmark lending rate is expected to have a ripple effect throughout the Kenyan economy. Banks will likely pass on the higher borrowing costs to their customers, leading to increased interest rates on loans for businesses, individuals, and mortgages. This, in turn, could curtail investment, dampen consumer spending, and further slow economic growth.

Borrowers, particularly those with variable-rate loans, will face the brunt of the higher lending rate. Households already grappling with the rising cost of living will see their debt burdens increase, potentially leading to increased defaults and financial distress.

The CBK’s move is a stark reminder of the complex trade-offs policymakers face in managing an economy. While raising interest rates may help curb inflation and stabilize the shilling, it also comes at the expense of economic growth and consumer well-being.

The CBK will need to carefully balance its monetary policy decisions to ensure that they are effective in addressing economic challenges while minimizing the negative impacts on businesses and households.

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