The interest rates on Treasury bills rose to new highs in the latest weekly auction, indicating higher returns for fixed income investors and setting the stage for more expensive loans.
The 91-day paper was sold at an interest rate of 7.925 percent, up from 7.866 percent last week.
The rate on the 182-day security rose to 9.096 percent from 9.037 percent while the return on the 364-day paper increased to 9.961 percent from 9.961 percent.
The Central Bank of Kenya (CBK), the government’s fiscal agent, sought to raise a total of Sh24 billion in the latest auction but collected Sh18.2 billion.
Investors put in bids of Sh19.3 billion, out of which Sh1.1 billion was rejected.
The interest rates on the short-term securities have an influence on the pricing of financial assets in the broader economy including loans and fixed bank deposits.
The rates paid on deposits by cash-rich banks and individuals follow the returns on the short-term government debt papers which are considered risk-free.
The deposit rates, together with lending rates, have a bearing on the margins bank get when lending to customers. Banks are also major investors in the treasuries whose rising returns are piling upward pressure on loans that have default risk.
At least six banks have gotten approval for their risk-based lending models, allowing them to re-price their loans in line with changes in key macroeconomic factors.
Average bank lending rates hit a 27-month high of 12.2 percent in April, reflecting the impact of the rising rates on T-bills.
The rising rates on T-bills are also set to boost returns on government bonds, which are redeemable in years to decades.
The increase in rates reflects the impact of rising inflation and the weakening of the local currency in recent months.
The cost of living increased to 7.1 percent in May as the cost of a wide array of commodities including maize, cooking oil, and petroleum products jumped significantly.
Some of the price escalations have been linked to the economic upheavals brought by the Russian-Ukraine war including supply chain disruptions and sanctions.