Interest rate increases in affluent nations have an impact on Kenya’s economy: central bank

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The tightening of monetary policy in advanced economies has had a great impact on Kenya’s economic and financial conditions, the Central Bank said Monday in a report.

The apex bank said the rate hikes in the countries have led to a rise in local interest rates, increased capital outflows, and a decline in exchange rates, adding that the situation has contributed to increased cost of living for households and a negative impact on savings and consumption.

“Capital markets face flight to safety as investors search for safe assets in the face of intense volatility in equities prices. This is even more pronounced for foreign investors, who face the twin risks of rising interest rates abroad and foreign exchange risks,” the apex bank said in the Kenya financial sector stability report.

According to the bank, global conditions have led to faster-than-anticipated monetary policy tightening to stem elevated inflation. The Central Bank rate in Kenya stands at a new high of 10.5 percent.

Kenya’s inflation rate stood at 6.8 percent in September, a rise from 6.7 percent in August on higher fuel prices.

The shilling has depreciated 21 percent year to date to stand at 149 to the dollar, noted the apex bank. The decline has had a negative impact on the forex reserves, which now barely cover four months of imports.

The Central Bank attributes the fall of the currency and reserves to “spillovers from rapid monetary policy tightening in advanced economies.”

While the bank said it expects the East African nation to be resilient and grow at 5.6 percent in 2023, it noted that tough economic conditions characterized by rising interest rates, higher costs of borrowing, and capital outflows, will hurt growth.

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