Deposit rate beats inflation first time in 15 months as lenders target funds


Central Bank of Kenya Governor Dr Kamau Thugge at a past event on July 17, 2023. PHOTO | LUCY WANJIRU | NMG

Return on fixed deposits beat inflation for the first time in 15 months in July signifying higher rates the lenders are willing to pay savers for long-term deposits as they compete for funds between themselves, the government, and collective investment schemes.

Data released by the Central Bank of Kenya (CBK) reveals that banks paid customers an average of 8.1 percent for long-term deposits in July, surpassing inflation for the month which stood at 7.3 percent.

Read: Banks raise fixed deposit rate in battle for premium savers

The difference between the two, which is the real interest rate, stood at 0.8 percent from a negative return in the past 15 months.

Inflation, which measures the cost of living or the erosion of money over time, had been rising reaching a 65-month high of 9.6 percent following geopolitical tensions but has since eased due to a drop in food prices as the supply of maize and several vegetables improved as a result of improved weather.

A positive real interest rate of 0.11 was last seen in April last year before the spillovers of the Russian-Ukraine conflict hit home, disrupting global supply chains and pushing inflation rates, especially in developing economies.

The higher returns on deposits are a result of the banks motivating depositors to attract huge amounts of money for onward lending to businesses as well as to the State, coming at a time when the rates for government securities have hit new highs.

In recent days, the National Treasury has been riding on multiple reopening of four short-term bonds with maturity duration of between two and five years to raise Sh222 billion since May, paying hiked interest rates of up to almost 18 percent that has worked as a mouth-watering deal for banks.

In July, commercial banks raised their base lending rates for the seventh straight month to close the month at 13.5 percent to reflect CBK rate hikes in the wake of rising returns on government paper, a development that signalled costly credit for borrowers.

The higher return on fixed deposits is, however, more of a windfall for fund managers and large institutions who are the majority investors in the accounts.

Read: Banks fixed deposit rate rises to a three-year high of 7.16 pc

Retail depositors largely hold a call or short-term deposits.

Kenyan banks offer two types of deposit accounts, namely call deposits and time deposits, with a significant gap in the interest rates offered on each.

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