The Central Bank of Kenya has increased the base lending rate by 100 basis points as inflation stayed above medium term target in May.
The central bank Monetary Policy Committee in its sitting stated that the move to tighten its monetary policy comes on the backdrop of sustained inflationary pressures as inflation rate rose to 8pc last month from 7.9pc in April on account of increases in non-fuel non-food index.
“The MPC this concluded that there was scope for a further tightening of the monetary policy to anchor inflation expectations. The Committee, therefore, decided to raise the central bank rate (CBR) from 9.50pc to 10.50pc,” Dr Kamau Thugge, CBK Governor and Chair of MPC.
MPC further expects inflation rate to remain high in the near term on account of increased electricity prices following the upward review of electricity tariffs in April by the Energy and Petroleum Regulatory Authority and the removal of the fuel subsidy.
Fuel prices are further expected to rise from next month with the increase of Value Added Tax (VAT) on petroleum products from 8pc to 16pc.
For borrowers, the move by the regulator now means higher cost of loans a move likely to reduce private sector demand in subsequent months.
Private sector credit stagnated at 13.2pc in April and May.
However despite risks emerging from the war in Ukraine and tightening on monetary policy in advanced economies, the central bank expects strong economic growth in the first half of the year propped by services sector and recovery in the agriculture sector.
The committee also noted a strong growth in the export receipts which has grown 5.5pc in a year to May 2023 supported by higher exports of tea and manufactured goods.
CBK says foreign exchange reserves of which currently stands at $7.4 billion which equals to 4.07 months of import cover provides enough buffers for short term shocks in the forex market.
This comes as the local currency continues with its free fall against the dollar, closing at a mean rate of 140.44 during Monday trade.