Declining Treasury bill rates point to lower cost of loans
Posted Sunday, August 5 2012 at 14:20
Declining Treasury bill yields and the falling inflation rate have set the stage for a cut in the cost of loans to consumers and businesses which have been bearing the brunt of high interest rates.
The three-month and 182-day Treasury bill rates fell to 12.864 per cent from 13.054 per cent and to 13.038 per cent from 13.379 per cent respectively in last week’s auctions.
It marked the first time that the two rates have eased after a steady increase over the past two months, when subscriptions remained low.
The drop in the interest rates comes days after the Kenya National Bureau of Statistics said that the inflation rate fell to 7.74 per cent last month, the first time in more than a year that the rates have dropped to single digits.
Razia Khan, the head of research for Africa region at Standard Chartered Bank said the drop in inflation was taking place much earlier, and much more dramatically than had been anticipated.
“We now go back to single digit inflation in Kenya, but more dramatically than anyone might have expected. Inevitably, the question will be around the policy implications when the Central Bank of Kenya meets in September,” said Ms Khan.
At the beginning of July, the banking regulator cut its benchmark interest rate— the Central Bank Rate— to 16.5 per cent from 18 per cent.
Ms Khan said that with the falling consumer prices, easing of the benchmark rate is more likely to happen.
Lenders are also the main investors in short term government paper and a drop in the returns is expected to make commercial lending more profitable.
This is also expected to increase the pressure for lower lending rates.
Investors’ appetite for the government paper also rose significantly.
The three-month Treasury bill which was seeking Sh4 billion was oversubscribed by more than two times, attracting bids worth Sh12.868 billion while the six-month paper which was also seeking another Sh4 billion was oversubscribed by 89 per cent, attracting bids worth Sh7.6 billion.
The banking regulator accepted bids worth Sh5.437 billion and Sh5.055 billion for the three and six month papers, majority of them competitive indicating that most of the investors were still seeking higher rates.
“I think that investors are now hungry for Treasury bills which has actually been captured by the results, however there is still a lot movement (in interest rates) in the market but the appetite is there,” said John Kamunya, head of research at Sterling Capital.
CBK accepted bids worth Sh5.055 billion of which 95 per cent were competitive bids in the issue which was oversubscribed for the first time since mid-June.
The previous week’s auction, which was seeking Sh3 billion attracted bids worth Sh2.468 billion as yields edged above 13 per cent but the banking regulator only accepted bids worth Sh1.698 billion of which a third were competitive.
“CBK was less willing to accept high rates,” said analysts at NIC Securities in a research note released on Tuesday.
NIC Securities in their research note added that Treasury bill rates could be stabilising, but that the government now requires more money to fund ballooning redemptions and that this should ensure that rates remain between 13 and 14 per cent in the short-term.
Mr Kamunya, however, said the falling cost of living could result in falling interest rates going forward.