Fall in interest rates boosts Treasury’s borrowing plans

The rate at which the Central Bank of Kenya (CBK) lends to commercial banks dropped again on Friday.

This prompted a further easing in the interbank lending rate, which is expected to boost the government’s borrowing plans.

The CBK overnight discount window rate fell to 15 per cent from 17.87 per cent on Thursday, a day after the CBK started publishing the overnight lending rate again after concealing it for one week. The inter-bank lending rate dropped to 16.2489 per cent compared to 19.2515 per cent on Tuesday.

Analysts said that additional liquidity in the money market would boost the ongoing diaspora infrastructure bond issue and would also help lift the valuation of current outstanding bonds as interest rates dropped.

“CBK is having a bond issue and the last papers have been undersubscribed. If liquidity comes back to normal the bond issue may be successful,” said George Bodo, an analyst with ApexAfrica Capital Limited.

The CBK is seeking Sh20 billion through a diaspora infrastructure bond that opened on August 16 and closes on September 27.

Mr Bodo said that the government, which is caught up between slowing down the effects of inflation, stabilising a depreciating shilling and keeping interest rates low, was competing for funds for development.

According to the infrastructure bond prospectus, the money would be used to fund the building of roads, geothermal power plants, electricity transmission lines and complete water, sewerage and irrigation projects.

But analysts are expecting interest rates offered by Treasury bills to come down in the short-term. It is also expected that some will sell to take profits as some outstanding bonds go up in value in the coming weeks. Results from the last auction of the 91-day Treasury bills — in which the CBK received bids worth Sh3.53 billion against the Sh2 billion it was seeking — indicate that the weighted average yield rose to 10.281 per cent from 9.708 per cent in the previous week.

Alex Muiruri, an analyst at African Alliance Investment Bank, said that CBK kept using different benchmarks to calculate the discount window, making it difficult to predict where it would stabilise.

“We still do not know how they are determining the overnight rate,” said Mr Muiruri, who added that he did not expect it to go below the 91-day Treasury bill rate.

The CBK revised the discount window rate upwards saying that banks were borrowing at the discount window and using the funds to buy dollars contributing to the depreciation of the shilling which fell to Sh94.52 low.

The shilling however appreciated to Sh92.40 after the banking regulator instituted the new measures and closed the week at Sh94.10.