A vicious cycle

1.Cost of lending up
2.Inflation up
3.Businesses may close -reduced tax revenue
4.Unemployment up
5.industrial strikes to for wage increases
6.Shilling to lose further


Impact on other variables

The traditional effects on an increase of interest rates are, among others, the following:
1. a fall in stock exchange and in the value of other assets (as houses);
2. a fall in profitability of firms;
3. a fall in private investment;
4. a fall in consumption credit;
5. an inflow of foreign capital for buying bonds;
6. an upward pressure on exchange rate;
7. a larger public expenditure to pay for a previously cumulated public debt, whose burden might lead to reduction in other chapters in public expenditure;
8. a narrower disposable income for households having a large debt taken at variable rates;
9. a larger disposable income for households that have lent to others at variable rates (e.g. they own government bonds with variable rates);
10. a redistribution of income from debtors to lenders (in the part of debt that has variable rates).

http://www.economicswebi...g/glossary/interest.htm

I can only see recession and loan defaults...guess December is a good time to lay off some workers

Infact the vice versa is likely .They will put more into the risk free government bonds as the government will be paying more interest.
How will banks lend more yet defaults are likely ?

@user, I agree with your first set of 1-6.

Bank lending rates will up, resulting in default rates upping, cost of business will rise as firms pass on the extra finanxcing ost to consumers, reduced profitability - affecting profitability and overall tax collection. Redundancies thus likely. And at the far end of the spectrum, socio-political unrest as people cant afford food.
Iko shida kubwa sana kweney siku za usoni.

Is this the price we have to pay to shore up the shilling vis-a-vis the greenback?

guess so, the economy will crush and demand for imports will drop, alternatively...rates may rise high enough to attract some portfolio flows, then again Uganda is at 25% on onite

I don't think Banks will actually increase the monthly repayment per se, only reckon the component of interest will be higher...in order to avoid default...especially on mortgages

I'm not a bank scarecrow as somebody once called me but ,banks change monthly repayment(instalments) with change in interest rate unless you are on a fixed interest rate mortgage/loan.This is from a personal experience over years.

Most loans are on fluctuating interest rate (nearly 90% by my estimation)
Things are bad

U were crying about inflation. I think MPC is hoping that the hike takes some wind out it i.e. Kenyans will save more.
Things were already bad before (record weakness of Ksh, inflation at record levels in real terms, BoP widening, no political will to reduce the GoK bill). Something had to give...

Step in the right direction by MPC and CBK...the economy need to cool off and start on a sustainable base and the only way to curb that capital demand is thru a rate hike...at the rate we were going before this hike Kenya would have entered -Ve growth by 1H 2012...Bravo CBK!

@User hiking interest rates and chopping them down has never killed industries...show me where? and how? In fact hypernflation can kill those industries and lead to social unrest..CBK is smoking the good stuff!