Interest rates jump as T-bills hit 10 percent, increases investor returns

The Central Bank of Kenya. PHOTO | DENNIS ONSONGO | NMG

Short-term interest rates on risk-free government securities have risen to 10 percent, piling pressure on returns for various assets including bank loans.

Investors secured a near four-year high rate of 10.109 percent in the latest auction of the 364-day Treasury Bill, a level last seen in January 2019 when the paper was sold at 10 percent.

The increase in short-term interest rates is enhancing returns for cash-flush firms and households while raising costs for borrowers including the government and businesses.

Rising inflation and the weakening of the shilling are the major factors behind the jump in interest rates, with investors responding to the challenges by demanding higher returns on their cash holdings.

The 364-day paper saw its interest rate rise from 9.965 percent in the previous week’s auction. The return on the 182-day security also rose to 9.691 percent from 9.678 percent while that on the 91-day paper moved to 9.139 percent from 9.127 percent.

The Central Bank of Kenya (CBK) had targeted to raise Sh24 billion in the auction but ended up taking a larger amount of Sh39.4 billion. This was after investors placed bids of Sh43.6 billion.

Most of the bids were on the 91-day and 364-day securities at Sh18.5 billion and Sh16.7 billion respectively.

The interest on bank loans and deposits have also been rising in recent months on what bankers attribute to the jump in both short and long-term interest rates.

Average commercial bank lending rates rose to 12.41 percent in September, according to CBK data. The rate of bank savings accounts also increased to 3.44 percent in the same month.

Interest on fixed deposit accounts, however, dropped to 6.82 percent from 6.93 percent in August, indicating that banks could have moved to lower their cost of funds by releasing the highest-priced accounts.

Higher inflation, partly driven by an increase in the price of food and petroleum products, is the major driver of the jump in interest rates. The cost-of-living measure rose to 9.6 percent last month.

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