The Central Bank of Kenya’s (CBK) Monetary Policy Committee raised the basic lending rate by two percent, from 10.5% to 12.5%, in December 2023.
The interest rate that CBK will impose on loans to commercial banks is known as the CBK base lending rate.
Commercial banks typically base their interest rates on the CBK base lending rate. Commercial banks will raise their interest rates in response to a rise in the base rate by the central bank.
Kenyan businesses and people have legitimately voiced their concerns in recent months about potential negative consequences stemming from the CBK rate increase.
More difficult to obtain credit: Higher interest rates inevitably drive up the cost of borrowing. Financing is necessary for businesses, particularly start-ups and SMEs, to expand.
This indicates that small firms find it more difficult to launch and obtain the funding they require for success as a result of the rising cost of borrowing.
The majority of individuals now have less money to spend on pointless goods and services because of rising interest rates and inflation-related price increases. This implies that sales may drop dramatically if consumers decide not to spend their hard-earned money on things they don’t think are necessary.
increased joblessness. Businesses may hire fewer people when they make less investments. This may result in increased joblessness.
reduced cost of assets. The value of stocks, bonds, and other assets frequently decreases when interest rates rise. People may become less wealthy and inclined to spend money as a result of this.
Price increases by suppliers: Purchasing the materials required for production may cost more as a result of price increases by suppliers. Businesses frequently have to raise their own pricing as a result in order to keep the same markup.
Businesses typically face increased financial burden and constricted cash flow as interest rates rise. As a result, the payee business’s cash flow may be impacted when they make late payments.
reduced rate of economic expansion. The cost of borrowing money for investments and business expansion increases when interest rates rise. The economy may grow more slowly as a result.
Higher interest rates have the potential to trigger a recession, which is a prolonged period of negative economic growth.
Although increasing interest rates can have a detrimental effect on businesses, there is no need for it to be catastrophic. Business owners can take certain measures to protect their companies from the negative impacts of rising interest rates.
Look for alternative, flexible, and fixed-rate funding. You can have some protection against rising interest rates by taking out loans with fixed rates for a period of five or six years. You may more precisely project your finances and business strategies for the near future when you have a fixed rate for a specific period of years.
In the current economic environment, flexible and alternate finance may also come in helpful. This offers adaptable credit lines that let you break up the cost of your expenses across a few months, which will make it simpler for you to pay your obligations on time.
It’s always a good idea to review and maybe alter your business plan and strategy in light of a prospective economic slump to ensure that it remains applicable.
This will entail assessing whatever debt you now have or anticipate taking on, as well as possibly changing the finance sources you had in mind.
Keep an eye on the shilling’s worth. A currency’s value may rise in tandem with an increase in interest rates.
The value of the shilling in relation to other foreign currencies should be kept an eye on by businesses that operate internationally and have revenue streams in other currencies, as this will impact their bottom line.
Lastly, keep an eye on your supply chain. You should monitor any suppliers if prices rise since, although you might be largely spared from the consequences, your partners might not be.
Changes in interest rates may not impact your finance, but they may have an impact on your suppliers. This implies that they will have to raise their prices, which usually means that you will too.
