Nearly all commercial banks (93 per cent) have increased or are planning to raise lending rates by up to two percentage points in coming weeks, a survey by the sector regulator has showed. This is nearly double the 49 per cent of lenders who said they would raise the cost of loans in May this year.
Higher interest rates could further soften demand for consumer loans, which shrunk by more than one-third in the second quarter of the year according to data by the Central Bank of Kenya.
Key productive sectors of the economy however more than doubled their demand for loans during the second quarter, indicating more optimism among private firms and farmers. The flipside to this increase is that it could lead to a rise in product inventories in a climate of lower consumer demand.
"I know some analysts have been wondering why we didn't raise the Central Bank Rate. But why would we raise it and cause more problems for the economy when the real reason for inflation is supply-side driven and not excess money supply?" posed governor Njuguna Ndung'u at a press briefing Monday.
"We should not be creating a situation for interest rates to rise further. When a neighbour's house is burning you don't rush in with a matchbox and fuel to cause more fire, but you carry water and wet blankets," he added.
Analysts said that the lower consumer demand was a result of decreasing confidence caused by rising inflation. The rate of inflation rose to 15.5 per cent in July, the highest since the new calculation method was introduced in November 2009.
Credit to private households and for consumer durables stood at Sh13.7 billion in the second quarter, compared to Sh21.3 billion in the first quarter - amounting to a 36-per cent drop.
"I think inflation has affected consumer confidence and so people are not willing to take loans just for spending," said John Kamunya, head of research at the Dyer and Blair Investment Bank.
"But on the other hand, there are many companies that have been raising money to expand production".
The agricultural, manufacturing and trade sectors borrowed upto Sh29.4 billion in the second quarter, compared to Sh11.6 billion in the first quarter - a 153 per cent increase.
Other sectors that saw a higher credit growth in the second quarter were transport and communications that took Sh11.6 billion in loans compared to Sh3.7 billion in the previous quarter. Real estate borrowed Sh13.0 billion, up from Sh6.1 billion in the first quarter of the year.CBK's Monetary Policy Committee (MPC) said in a press release that growth expectations for the year were broadly on track.
"Strong economic growth has also been supported by credit expansion to the productive sectors of the economy. Sustained growth performance is necessary to ease inflation," read the press statement in part.
Credit expansion for the entire private sector grew in the second quarter of the year by Sh88.5 billion, compared to Sh66.0 billion in the first quarter of the year - a 34 per cent jump.
CBK however said it did not see the rise in lending as influencing the inflation rate which rose to 15.53 per cent in July.
"The fact that consumer-related lending is lower means that inflation is not being driven by availability of cash," said Prof Ndung'u.
In particular, credit for consumer durables such as cars, furniture and holidays was down to Sh1.7 billion compared to Sh6.0 billion in the first quarter of the year.
Explaining the MPC's decision to retain the CBR at 6.25 per cent, he said news signalling that food imports would be needed often caused market actors to expect a rise in prices or demand for foreign currency to finance imports. The higher forex demand had the impact of putting pressure on the local unit, he said.
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