Domestic interest rates have peaked pointing to a pause on high-risk environment that had catapulted the rates to years’ records after the Central Bank of Kenya (CBK) raised its benchmark lending figure to counter effects of runaway inflation and currency exchange volatility.
The risk-off environment has been underpinned by a fall in inflation rate which declined below the mid-target of five percent in July to 4.3 percent before rising slightly to 4.4 percent in August.
Treasury bill rates, savings and deposit rates, lending rates and interbank rates have all marked a decline in recent weeks signalling incoming relief for borrowers even as lower returns mean a drop to investor yields from asset classes such as fixed deposit accounts, government securities and money market funds.
Average commercial bank lending rates fell for the first time in 21 months at the end of July, easing to 16.84 percent from 16.85 percent in June.
Deposit rates- the return paid by banks for term deposits similarly fell for the first time in 16 months in July to 11.28 percent from 11.48 percent in June.
Moreover, the savings rate- the yield on bank current and savings accounts (Casa) saw its first drop in five months in the same period to 4.56 percent from 5.11 percent.
Interest rates on Treasury bills have also declined for six straight weeks since the beginning of August as the Central Bank of Kenya (CBK) clamps down on aggressive investor bids in its quest to drive down returns from government securities.
CBKs move to cut its benchmark interest rate last month to 12.75 percent from 13 percent in the backdrop of falling inflation and stability in the exchange rate was largely interpreted as signalling to the market the direction of interest rates in days ahead.
The move by the apex bank has quickly seen inter-bank lending rates- the cost of overnight borrowing between lenders softening from a year to date high of 14.1779 percent in February to a near nine-month low of 12.6183 percent as of Monday this week.
Lower interest rates are widely expected to resuscitate private sector lending by commercial banks after growth in loans to the sector collapsed to a multi-year low of 3.9 percent in June on steep borrowing costs.
Equally, the banking sector non-performing loans whose ratio touched a near two-decade high of 16.3 percent in June are expected to wear off on improved repayments as borrowers see lower borrowing costs.
Returns on assets are expected to ease including commercial bank lending margins and yields from fixed deposit accounts, Treasury bills and collective investment schemes.
Real returns- interest earnings after inflation are seen staying relatively attractive as the prevailing inflation rate remains below the targeted mid-point of five percent.
