Kamau Thugge strikes, sets tone with highest loan rate in seven years

Just a week into office, new Central Bank of Kenya Governor Kamau Thug called a surprise policy-setting meeting on Monday that sent the record lending rate up to the highest point in nearly seven years on growing fear of a sharp rise in consumers. the prices.

This move, which sets the tone for the new leadership of the Central Bank of Kuwait, ushered in a new era of expensive bank loans and will erode the purchasing power of Kenyan consumers.

Higher interest rates mean that consumers will spend more to service their loans. Besides bank borrowers, higher rates will also affect ordinary consumers in the form of more expensive goods on the shelves.

Nor will the government, which is expected to draw the majority of its debt financing for the new fiscal year from the domestic market, be exempt from this.

The regulator raised the central bank rate by 1 percentage point at the surprise meeting of the Monetary Policy Committee (MPC) on Monday to 10.5 percent from 9.5 percent, setting the benchmark lending rate at the highest level since July 2016 or the highest level in 82 months.

The rate of increase was also the highest in nearly eight years since July 2015 when the CRC rate increased by 150 basis points (1.5 percent).

Wesley Wesley: “This is a future rate hike, as the Central Bank of Kuwait looks to contain the effects of the 16 percent value-added tax on fuel and the impact of other taxes from the Finance Act 2023. The Central Bank of Kuwait seeks to control inflation.” Manambo, a research analyst at Cengiz Capital, told L.L.C The daily business.

While raising the benchmark interest rate, the Monetary Policy Committee noted the continued pressure on inflation and noted the risks of higher consumer prices which in its view would have a negative impact on the economy.

Overall inflation is expected to remain high in the near term, mainly due to the recent increase in electricity prices, the removal of fuel subsidies, and the associated second-round effects. In addition, a mini-survey of the agricultural sector in the first half of June showed that prices of some major foodstuffs, especially sugar and corn, remained high.

The higher reset of the benchmark interest rate, which seeks to reduce demand for goods and services in the economy by limiting the money supply, comes barely a month since the Central Bank of Kuwait, under the previous leadership of Dr Patrick Njoroge, left interest rates unchanged on improvement. Inflation expectations.

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The Central Bank of Kuwait has since witnessed a change of guard, with Dr. Thuj taking over as the new governor of the main bank on June 19.

On May 29, the Monetary Policy Committee chose to leave interest rates unchanged, assessing inflation pressures at that time as moderate while forecasting better precipitation this year to ease food prices, which has the greatest impact on inflation.

Food price inflation is expected to subside in the coming months after prolonged rains and lower global food prices. However, recent increases in electricity prices, removal of fuel subsidies, and sharp rise in sugar prices are expected to put moderate pressures on headline inflation.

On the external front, the Central Bank of Kuwait notes that the global economic outlook remains uncertain, reflecting persistent concerns about the stability of the financial sector in advanced economies, continued geopolitical tensions, and expansion of monetary policy to tighten interest rate increases by central banks in advanced economies.

The Central Bank of Kuwait’s sudden interest rate hike comes on the back of President William Ruto’s approval on Monday of the 2023 Finance Law, paving the way for the implementation of new taxes that will take effect from July 1.

The tax proposals are widely expected to put further pressure on inflation, with for example doubling the value-added tax on petroleum products and raising the cost of fuel by more than £10 per liter from Saturday this week.

Doubling the VAT rate on petroleum products alone is expected to have a multiplier effect not only on transportation costs but also on food and electricity prices.

This is set to send the inflation rate beyond the 8.0 percent print in May, from a slight decline of 7.9 percent in April.

Inflation has remained stubbornly above the government’s appropriate level of 2.5 to 7.5 percent since June last year, mainly due to higher food prices and lower productivity from lower rainfall over the past two agricultural seasons.

While higher lending rates may achieve the goal of reducing demand and dampening the effects of second round inflation, higher interest rates will leave a bitter taste in the mouth of borrowers who will see their monthly loan payments rise along with the benchmark lending rate.

Indeed, the cost of borrowing is at its highest level since July 2018, with the average commercial lending rate at 13.1% as of April, according to CBK secondary data.

The rising cost of borrowing is expected to start dampening private sector credit growth, which has so far shown resilience, holding steady at 13.2 percent in both April and May as demand for credit continues, particularly by companies that have highlighted working capital requirements. .

According to the Central Bank of Kuwait, strong credit growth has been observed in the manufacturing, trade, real estate, transportation and communications sectors.

The Central Bank of Kuwait added, “The number of loan requests and approvals remained strong, reflecting increased demand and resilient economic activities.”

For its part, the government is expected to face mounting pressure to pay a higher risk-adjusted rate of return as investors price in the higher benchmark lending rate and the impact of sustained inflation on the real yield — the actual return on investment after factoring out. in inflation.

Short-term Treasury yields are already on track to reach 12 per cent, with the yield on the 364-day Treasury note, for example, peaking at 11.934 per cent last week, up from 11.734 per cent the week before.

is reading: The Central Bank of Kuwait is referring to costly loans after raising interest rates to the highest level in five years

Previously, the Central Bank of Kuwait stated that higher interest rates for borrowers would be the opportunity cost of keeping the inflation rate low. Central Bank of Kuwait Governor Dr Njoroge said the rising cost of living will have far-reaching consequences in the medium to long term from the impact of more expensive loans.

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