The Treasury expects interest rates to decline further this year despite a widening budget deficit that will see the projected net borrowing from the domestic market cross the Sh1 trillion mark for the first time in the upcoming 2026/2027 fiscal year.
The government’s increased borrowing appetite would ordinarily yield upward pressure in interest rates, but a liquid money market and Central Bank of Kenya (CBK) rate cuts saw returns from government securities fall last year.
Treasury bonds auctioned in 2025 paid coupons or interest rates of between 11.67 percent and 14.63 percent, down from highs of up to 18.5 percent in 2024.
Treasury bill interest rates fell to a range of 7.7 percent to 9.23 percent in the last auction of December, from a range of 9.8 percent to 11.4 percent at the beginning of the year.
The lower rates were partly informed by policy actions in larger economies, which cut their base rates as inflation fears receded, thus giving smaller market central banks room to reduce their own rates without harming the competitiveness of their markets for international investors.
In Kenya, the CBK rate cuts were also backed by a stable exchange rate and relatively low inflation.
“We expect even lower rates in 2026, partly informed by global happenings, because we are not isolated as a country. In the US, they are lowering the interest rates, and locally things are getting better, with our inflation managed below the five percent midpoint,” Treasury Cabinet Secretary John Mbadi said in December.
“Unless the weather patterns change drastically, the macros will remain stable, and therefore interest rates can only get better. We are hopeful that 2026 will see more credit going to the private sector, expanding economic activities, and creating more jobs.”
Analysts at Sterling Capital, in a January 2026 fixed income note, said that the domestic interest rates have been responsive to the CBK’s recent rate cuts, pointing to a further decline in the short term.
This is especially the case if the CBK continues to ease its policy in a bid to boost private sector credit growth, which remained in the single digits at 6.3 percent in November 2025.
“While the government is faced with the challenge of financing a growing budget deficit, the revision of the Central Bank Rate (CBR) has been more effective in determining the direction of interest rates,” said Sterling Capital in the note.
In its December meeting, the CBK’s monetary policy committee lowered the base rate by 0.25 percentage points to 9.0 percent, marking the ninth straight rate cut since August 20254, when the CBR stood at 13 percent.
For the Treasury, the rate cuts have helped lower the cost of borrowing at a time when it is leaning more heavily on the domestic market to finance its budget deficit.
The recently released Draft 2026 Budget Policy Statement shows that in the 2026/2027 fiscal year, the government will seek a net borrowing of Sh1.006 trillion from the domestic market and Sh99.5 billion from external lenders, in order to fill a budget deficit of Sh1.106 trillion.
In the current fiscal year (which ends in June 2026), the government has a domestic borrowing target of Sh613.5 billion, and an external target of Sh287.4 billion.
This is, however, likely to be revised upwards in the next supplementary budget, which is tentatively expected to come out next month, due to underperforming revenue collection.
