Markets & Finance

State misses tax target, higher rates eyed

CBK

The Central Bank of Kenya building. Interest rates are likely to come under pressure. PHOTO | FILE

Interest rates are likely to come under pressure in the short term, after the government raised its borrowing target for the current fiscal year and failed to raise enough revenue.

The tightening liquidity in the money market as the Central Bank of Kenya (CBK) mop ups up cash in an effort to support the shilling, is also seen as likely to leave investors demanding higher yields for both primary and secondary debt issues.

Higher Treasury bill rates in turn directly impact the pricing of credit offered to the private sector. The benchmark Kenya Banks Reference rate (KBRR), whose next review is slated for July, factors in a three-month average weighted T-Bill rate, in addition to the Central Bank Rate (CBR). The current rate is 8.54 per cent.

According to CBK, commercial bank average lending rates at the end of March stood at 15.46 per cent, having come down from 16.91 per cent in July 2014, when KBRR was first introduced.

“CBK’s pursuit to stick to its current monetary policy path with key objectives of moderating inflation and managing exchange rate volatility through keeping liquidity in a tight lid will push investors to bid for higher rates due to money market restrains,” said Genghis Capital analyst Vinita Kotedia.

“We therefore expect yields on Treasury bills to shift upwards for the remaining part of the 2014/2015 financial year.”

Last week’s auction of Treasury bills showed low investor appetite for the Sh3 billion and Sh4 billion worth of 182-day and 364-day at the offered rate, attracting combined bids worth Sh630 million.

The two offers returned interest rates of 10.5 and 10.8 per cent for the 182-day and the 364-day respectively.

On the other hand, the shorter Sh1 billion 91-day bill attracted bids worth Sh2.6 billion at a rate of 8.12 per cent, indicating investors may be wary of locking in longer issues at current rates.

READ: Treasury faces funding headache as revenue falls short by Sh93.8bn

Analysts say other factors likely to push up interest rates is the revision of domestic borrowing target to Sh163.7 billion from Sh101.7 billion as revenue fall short of the Sh874.5 billion target for the period July 2014 to March 2015 by Sh93.8 billion.

They expect the government to be aggressive in borrowing through Treasury bonds and bills.

“The shortfall in revenue collection is a key concern to us, as it points to a likely higher borrowing in the coming year, resulting in higher domestic interest rates or higher taxes —both of which are not conducive for economic growth unless the tax incidence is targeted at a different set of economic actors,” said Standard Investment Bank analysts.

CBK’s decision to leave CBR unchanged even as it pursues a tightening monetary policy is seen as move to avoid an interest rate spike, given the negative implications on growth of the economy.

The regulator instead opted to raise the maximum rate for term-auction deposits (TADs) to 2.5 percentage points above CBR, meaning banks will now be more inclined to take up the TADs, thus adding to the effectiveness of the liquidity withdrawal by CBK.

“In the move not to raise the CBR, they have avoided meddling too much with the KBRR, and skirted the higher interest rates that would be the result,” said Commercial Bank of Africa senior dealer Joshua Anene.