Kenya has moved to control an imminent increase in the cost of living by raising the rate at which commercial banks borrow from the Central Bank as a lender of last resort from 10 per cent to 11.5 per cent.

At the same time the government has adjusted upwards the uniform base lending rate for commercial banks popularly known as Kenya Banks’ Reference Rate (KBRR) from 8.54 per cent to 9.87 per cent, setting a stage for expensive loans effective July 7, 2015.

The latest policy position comes amid weakening shilling and rising inflationary pressures which are now translating to increased cost of imports and a surge in prices of essential commodities.

The Central Bank of Kenya (CBK's) monetary policy committee (MPC), holding its first session under the chairmanship of the newly appointed governor Patrick Njoroge, noted elevated risks to the inflation outlook mainly attributed to pressures on the exchange rate over the last few months.

“The MPC will continue to monitor external and domestic developments and their implications on the risks to the overall price stability,” said Dr Njoroge.

The policy rate usually indicates the direction the government wants the interest rates in the economy to go.

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The latest monetary policy stance signals an increase in the cost of loans to the private sector in a bid to reduce spending by households and businesses in East Africa’s biggest economy.

Reducing the amount of money in circulation eases demand for goods and services thereby containing inflation and reducing pressure on the local currency.

Private companies expect inflation to rise mainly on account of pass-through effects of past exchange rate movements and increases in fuel prices.

Kenya’s overall month-on-month inflation for the month of June 2015 rose to 7.03 per cent from 6.87 per cent in May 2015, mainly fuelled by high cost of fuel (diesel, petrol and kerosene) which increased the cost of transport with a knock-on effect on the prices of essential commodities.

The increase in inflation also reflected the knock on effects from the weakening Kenya shilling against the US dollar and demand pressures in the economy.

The Kenyan shilling has remained under immense pressure against the US dollar surpassing the Ksh100 mark against the greenback, the lowest since October 2011.

Dr Njoroge said the shilling has remained under pressure, mainly reflecting the strengthening of the dollar against most world currencies.

“In addition, the current account deficit widened in part due to increased imports of capital equipment and weak exports,” said Dr Njoroge.

During the first quarter (January-March) of this year Kenya’s current account worsened despite cheaper oil prices mainly due to a significant increase in the import bill against a contraction in export earnings.

Interest on commercial bank loans averaged 15.52 per cent compared to 17 per cent in a similar period last year.

The central bank level of usable foreign exchange reserves stands at $6.63 billion (equivalent to 4.2 months of import cover).

“The precautionary facility with the International Monetary Fund (IMF) provides an additional cushion,” said Dr Njoroge.