The Monetary Policy Committee (MPC) had a press release yesterday announcing an increase in Central Bank Rate (CBR) by 0.75 basis points. This is quite an increase, which raises the CBR from 7.50% to 8.25%. 

When this happens, what does it mean for you? Let me give you a small run down of how this will likely impact your finances. 

What is Central Bank Rate (CBR)?

Simply put, the CBR is the interest rate a country’s central bank, CBK, in our case, charges domestic banks when they borrow money. The change in the bank rate is a monetary tool used to manage the money supply, driving the economy in a particular direction. 

Since the CBK has increased the CBR, below is how it could impact you:

Bad For Credit

Since domestic banks will be borrowing from the CBK at a higher rate now, they are more likely to follow suit and shift that burden to their borrowers. That means increasing their lending rates to customers like you. 

So, the cost of borrowing from your banker to buy your car, start a business, or get a personal loan will increase. Maybe your banker could offer you a loan at 13% if you tried borrowing today. But if the bank revises its interest rate upwards due to the increase in the CBR, you could be offered 14% or 15%.   

Since borrowing money will become more expensive, individuals and businesses will reduce running to financial institutions to ask for credit. So it will ultimately reduce how much money we have for spending. And this brings us to the effect it will have on inflation.  

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Anchoring Inflation

The inflation rate has just been spiking upwards in the past few months, higher than before. CBK has also announced an increase in the overall inflation rate from 8.3% in July to 8.5% in August. In August 2021, the country’s annual inflation rate was 6.57% (inflation rate history). See how it has been rising? 

The effect you feel when inflation rises is the loss of value in the shilling due to increased prices. For example, the shilling is worth less than it was three months ago. Even a year ago. Just look at your shopping list and compare the prices of goods, like unga, cooking oil, and sugar.

By increasing the bank rate, CBK hopes to increase the cost of borrowing, reducing disposable income (see the first point). However, it is not just about reducing the amount of disposable income in the economy. When people have no money to spend, demand for goods and services goes down and outpasses supply. This effect drives the prices for said goods and services downwards, thus reducing inflation. 

But it is Great For Your Savings 

But the rise in interest is not such a bad thing. While it increases the cost of borrowing, it might also increase savings accounts yield. These include funds in Money Market Funds, fixed deposit accounts, and Certificates of Deposits (CDs). So now is probably the time to put more money into your savings accounts and enjoy the benefits of an increased bank rate. However, this will probably not be an immediate effect and will also be nominal. 

It Takes Time

The effects of monetary changes are not usually immediate. They can even take more than a year. Plus, there is more to the current inflation rates affecting many economies, increasing the cost of imported energy (fuel) significantly. But this is a significant step to getting started on curbing inflation. And it is not just the Kenyan Central Bank taking these measures.