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Kenyans to brace for expensive loans as IMF policies take effect

Kenyans to brace for expensive loans (to pay more loan interest) as IMF policies take effect.

Tightened cash supply in the banking system has triggered a fresh sharp increase in the cost of lending between banks, data by the Central Bank of Kenya (CBK) shows, raising the possibility of a surge in the prices of loans.

The push will see a hike in loan interest rates (expensive loans) amid a push by key economic and development partners such as the International Monetary Fund (IMF).

The developments were aligned with a sharp increase in the cost of lending between banks, where the inter-bank rate shot up to the highest levels since October 4, 2021, when it stood at 6.69 percent.

On December 23, 2022, the rate shot up to 6.69 percent before easing to 6.42 percent on December 28, 2022, this being the highest in more than a year.

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The Interbank rate is the rate of interest charged on short-term loans between banks. 

Banks use the interbank lending market to borrow and lend money in order to manage their liquidity and adhere to rules like reserve requirements.

The Central Bank Rate (CBR), which was established at 8.75 percent on November 23, 2022, at the March Monetary Policy Committee (MPC) meeting, is presently only 2.33 percentage points behind the recently rising inter-bank rate.

This could hit borrowers as more banks adjusted their lending rates following the November 2022 raise.

Lenders already notified their customers of the higher interest rates that will take effect on January 6, 2023. 

Some banks raised the base lending rate for their Kenya shilling-denominated loans to 11 percent from 10 percent and their dollar-denominated loans to 10 percent from 9 percent.

CBR may rise further during the next MPC meeting scheduled for January 30, 2023, amid a push by key economic and development partners such as the International Monetary Fund (IMF) for more raises of the rate to tame inflationary pressure.

MPC is CBK’s top decision-making organ on fiscal policy. 

The IMF wants the CBR raised further to curb inflation and help deal with the effects of foreign currency shocks.

The decision was attributed to sustained inflation amid continued global risks that could unleash further negative impacts on the local economy.

This move by the CBK received backing from the IMF, with the agency welcoming the approach.

“The Central Bank of Kenya’s (CBK) monetary policy stance is welcome. Further tightening would limit second-round effects and keep inflationary expectations well-anchored while supporting external adjustment” the IMF commented.

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