The Central Bank of Kenya, CBK, has made an upwards review of lending rates, which signals its intention to reduce the amount of excess cash in the economy, and seen as one of the factors driving ongoing surge of inflation. The bank said the monetary policy advisory committee, the outfit that advises the bank on monetary matters, had set the central bank rate, CBR, at nine per cent, 0.25 percentage point above the previous rate of 8.75 per cent. The CBR is the rate at which the central bank lends to commmercial banks and whose adjustment usually acts as a signal to commercial banks as to what direction the lending rates should head.
Upward adjustment means a tightening of monetary policy which happens when banks revise their lending rates upwards raising the cost of money. An adjustment in the opposite direction represents a loosening of monetary policy that makes lending more affordable hence increasing the amount of money circulating in the economy.” Economic and financial developments since the beginning of the year led the committee to its first decision to adjust the CBR with immediate effect to allow room to deal with the excess liquidity”, the bank said.
The decision follows calls by a cross section of economists for intervention to tame runaway inflation. Latest official statistics indicate that the price of goods and services consumed by ordinary Kenya grew in May, pushing monthly inflation to 31.5 per cent from 26.6 per cent in April. There have been calls for CBK to intervene and bring down inflation but the bank calls for CBK to intervene and bring down inflation but the bank insists the spike is temporary and that it has no control over food and fuel prices, which are behind the surge. Economists say that if such a trend is allowed untamed, many people will be forced into the poverty bracket due to rising food prices.