The increase in interest rates by the Central Bank of Kenya – CBK will have a significant impact on borrowers, typically making it more expensive and challenging to access credit.
Generally, CBK raises rates to combat economic issues that may be biting the country. We know that the Kenya Shillings has faced increasing weakness against the US dollar for example and other major currencies. Raising the interest rate could help support the Kenya shilling from slipping further.
But – is it good for you?
First – let’s discuss the impact of raising interest rates. Interest rate hikes come with direct and indirect impacts.
Here are some direct impacts of raising interest rates:
1. Higher borrowing costs: This is the obvious one. If you have an existing loan, such as mortgages and car loans – it will become more expensive to service the loan because your interest payments will rise. Normally banks increase by 2.5 to 3 percentage points above the CBR rate / and or above their existing rate. The result of this?
Strained borrowers’ budgets, potentially leading to defaults. Already in the last 3 months to September 2023, borrowers have defaulted to close to 615b – marking 3 straight months of increasing defaults.
Interesting note – Commercial banks had advised CBK not to raise interest rates – especially because they tend to suffer the brunt of the effect – increasing defaults, and higher Non-Performing Loans (NPLs) loaded on their books.
Also Read: More Pain as CBK Hikes Loan Interest Rates to Record High
2. Reduced access to credit: Individuals and businesses will find it harder to qualify for new loans due to stricter lending requirements and higher borrowing costs. In fact – don’t expect business to look to borrowing any time soon. The effect of this – hinder investment, expansion, and consumption.
3. Decreased purchasing power: Consumers will have less disposable income due to higher debt payments – especially if they are repaying a loan. This will lead to reduced spending on goods and services.
This can and will cause a ripple through the economy, impacting businesses and overall economic activity. When spending numbers for the holiday period will be tabulated in January 2024, expect to see businesses complaining of lower spending by consumers on goods and services.
Expect to see the overall amount of money spent per income bracket to be lower and the aggregate spend this year over last year to be lower.
Some indirect impacts include:
1. Lower asset values: Rising interest rates can make investments like stocks and bonds less attractive, leading to potential price declines. We have already begun to see this. If you ask anyone at NSE – we are in a bear market. Investors are not bringing in money to the stock exchange as they normally do. This could impact borrowers’ retirement savings or other investment portfolios.
2. Slowed economic growth: If borrowing becomes too expensive, businesses may delay expansion plans and hiring, and consumers may spend less. This can lead to slower economic growth and potentially higher unemployment.
The Stanbic Bank Kenya’s Purchasing Index (PMI) shows that most companies show weak business confidence – especially firms surveyed in the manufacturing, construction, wholesale and retail, services sectors. Input prices are already high – especially fuel and material costs. Increase in interest rates does not offer much needed help.
3. Increased financial stress: The combined effect of higher debt payments, reduced access to credit, and potential job losses can lead to increased financial stress for borrowers. This can have negative consequences on mental and physical health. This is depicted in behavioral changes like withdrawal from social activities, or physical symptoms like stomach ulcers, headaches and the like.
Also Read: 7 Items Whose Prices Have Decreased
Is it all doom and gloom?
It’s important to note that the impact of interest rate hikes is not always negative. It is actually dependent on several factors:
1. Magnitude of the increase: Smaller hikes may have a less pronounced effect than significant jumps. CBK has raised the rate from 10.5% to 12.5%. That’s 2 percentage points. It will be interesting to see the commensurate increase by the commercial banks.
2. Borrower’s financial situation: Borrowers with strong credit history and stable incomes may be less impacted.
3. Purpose of the loan: Loans for essential needs like housing may be prioritized over discretionary borrowing.
4. Overall economic conditions: A strong economy with low unemployment can offset some of the negative effects. Kenya is not in this state currently. We see high cost of living, higher unemployment rates like never before and a bartered economy. This will definitely have an effect.
Saving the Kenya Shilling
To sum this up – Central banks typically raise interest rates to combat inflation or cool down an overheating economy. In our case, CBK has raised the rate to curb inflation and support the battered Kenya Shilling.
Consider that since January the shilling has shed over 23% of its value against the dollar. In essence this also has increased the cost of servicing our external debt as this lower value has loaded close to Kshs 6.9billion to the debt as service costs. It is no wonder they would not heed Commercial Banks plea not to increase interest rates.
While this could be considered necessary for long-term economic stability, it’s crucial to consider the potential impact on borrowers and implement supportive measures where needed.
