Central Banks in both developed and emerging economies are raising their benchmark lending rates amidst the high cost of living due to soaring inflation rates.
The lending rates have a considerable impact on the economy for consumers and businesses from both spectrums.
The recent country to revise its rate is the United States whose Federal reserve increased its rate by 0.75 percent, the highest ever in 28 years.
Bank of England (BoE) also increased its rate by 25 basis points (0.25 percent) to 1.25 percent.
It is a technical move by the central banks to curb the rising inflation rate that has been witnessed in recent months all over the world, owing to the ongoing war between Russia and Ukraine.
The war will enter its fourth month on June 25, 2022 in what could become a protracted period of feeble growth.
Higher interest rates affect the cost of borrowing for banks. This trickles down to businesses, households and even governments.
Higher borrowing costs slow borrowing activities in the economy, eventually tapping brakes on inflation, which is the objective of central banks in raising interest rates.
Those who have to borrow face higher costs, but those with fixed rates on long-term loans, like mortgages stand to benefit as the value of the repayments has diminished in real terms.
How does inflation work?
A little inflation is normal and even good for a healthy economy. It, however, becomes a problem when it grows too quickly. Money losing value at a rapid rate can lead an entire economy to spiral out of control, according to finmaster.
All governments and central banks try and control inflation with regulation and monetary policy by hiking benchmark rates.
Inflation, common in monetary phenomenon, occurs when there’s an increase in production costs or when demand for products and services increases faster than supply. Inflation can come about in many different ways.
If it costs more to make a product or provide a service, the companies will pass that cost on to consumers by increasing the price of those products and services.
If everybody wants to buy something that is in limited supply they will be willing to pay more money for it and the companies will charge more for the same product or service.
When prices rise due to cost-push or demand-pull inflation people expect higher wages so they can keep their lifestyle and standard of living. Higher wages make companies increase the price of their goods and services. This raises the cost of living and makes workers demand higher wages.
Kenya’s Central Bank (CBK) raised the benchmark lending by 50 basis points to 7.5 percent.
It marked the first rate hike since July of 2015, to anchor inflation expectations amid strong price pressures due to an increase in commodity prices exacerbated by the conflict in Ukraine.
The annual inflation rate in Kenya accelerated to a seven-month high of 6.47 percent in April from 5.56 percent in March, reflecting higher prices of basic food and fuels, but still within the bank’s 2.5 percent to 7.5 percent target band.
The global economic outlook has become more uncertain, reflecting the impact of the ongoing Ukraine conflict, uncertainty about the required policy responses in the advanced economies, effects of COVID-19 containment measures in China, and persistent supply chain disruptions.