Investors in T-bills, bonds trounced inflation in 2023

The real interest rate describes inflation-adjusted returns on specific investment instruments by deducting the inflation rate from the nominal rate of return or interest rate.

The average interest rate for the 91-day Treasury bill closed in 2023 at 15.7 percent, with the inflation rate at 6.6 percent.

Comparatively, the shortest-dated Treasury instrument closed in 2022 at 9.33 percent against a 9.1 percent inflation rate.

Nominal interest rates on government securities soared in 2023 as Central Bank of Kenya (CBK) Governor Kamau Thugge tightened monetary policy by raising the benchmark interest rate to counter weakness in the domestic exchange rate and anchor inflation expectations.

Read: Interest rates on Treasury bills drop first time in two years

Since taking office on June 19, Dr Thugge has raised the key lending rate three times, setting it at 13 percent in February this year from 9.5 percent, with the first lift coming within a fortnight of his takeover.

In April, Dr Thugge observed that the intervention measures had the desired effect even as they left borrowing costs elevated.

“The MPC noted that its previous measures have lowered inflation, addressed exchange rate pressures, and anchored inflationary expectations. The committee further noted that overall inflation would continue declining in the near term, supported by lower food and fuel prices and the pass-through effects of the recent exchange rate appreciation,” the CBK said in a statement on April 3.

Inflation has continued to recede, falling to the targeted midpoint of five percent in April to set up investors for an even greater risk-adjusted rate of return as interest rates remain elevated.

Real returns on longer-dated securities such as bonds stand even higher, fuelled by aggressive bids as investors seek a hedge to duration risks.

The signalling of higher interest rates by the CBK has resulted in not only higher rates on government securities but also commercial bank lending.

“During the year under review, the CBK increased the Central Bank Rate to 12.5 percent in December 2023 as part of monetary policy measures. The 91-day Treasury bill rose to 15.7 percent from 9.33 percent in December 2022,” KNBS indicated.

The average interest rate charged on commercial bank loans and advances rose to 14.63 percent from 12.67 percent while inter-bank rates soared to 11.65 percent from 5.39 percent.

The sweetened risk-adjusted returns are expected to subside this year, with interest rates anticipated to ease due to slowing inflation and a lesser demand for credit by the government from the domestic market due to outsized external disbursements. Higher interest rates have elevated domestic debt service costs for the government while fueling loan defaults in the banking industry.

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