Kenyan Central Bank cuts borrowing target, signals intent to end high interest rate era

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Interest Rate Movements – Kenya; Source – Central Bank of Kenya

In the past week, the Kenyan Treasury through the Central Bank of Kenya (CBK) has made perhaps one of the more concrete steps to curb the rise in interest rates, a key concern that had rocked Kenyans’ view and optimism in growing the economy this year.

In the Budget Policy Statement released this week, the Treasury revised down by KES 53.3 billion its domestic borrowing target to KES168 billion, which means that the pressure to borrow has reduced at a time when there are heavy maturities of domestic debt. Analysts had raised caution against the heavy borrowing plan targeted by the CBK where as at end of 2015, the Government had around KES 220Bn left to borrow in the financial year 2015/16, at a time when inflation was at a 3 year high, and interest rates had crept up to discouraging levels for homesteads and businesses alike. Towards end of 2015, the rates had spiked to 22 per cent, then inching lower to stabilise at 11.5 per cent – 14 per cent.

There was widespread concern that with the government stepping up local borrowing to fund the 2nd half of the financial year, amidst KRA missing half year revenue targets and significant maturities of previously issued treasury bills and bonds in the first half of 2016, the interest rates would further spike hurting an already slowing economy, and a Kenya Shilling facing immense pressure from the globally appreciating Dollar. The Kenya Revenue Authority (KRA) missed its half -year tax collection targets by a massive KES47.6 billion (around 8% of target), signaling a possible widening of the budget deficit with far-reaching consequences on the economy.

The Central Bank of Kenya (CBK) has accepted just 60 per cent of the Treasury bill bids since the beginning of the year indicating resolve to keep current loan rates stable. The latest CBK data shows investors bid a total of KES 36.75 billion against the offered KES12 billion worth of 182 and 364-day Treasury bills this week, with the CBK accepting only KES 18.23 billion. The cumulative bids for all three tenors of T-bills since the turn of the year stand at KES137.35 billion, with the accepted amount at KES 81.2 billion.

The restraint by the government in taking up funds is helping keep interest rates on the short-term debt in check; against fears in the market that the heavy maturities (and repayments) combined with a yawning budget deficit would push the rates upwards. Interest rates on all three Treasury bill tenors that had climbed to a four-month high in mid-January came down this week, with the 182-day paper rate falling by 0.46 percentage points to 13.91 per cent and the 384-day paper rate reducing by 0.5 percentage points to 13.96 per cent. The CBK has indicated to the market that it is concerned by the burden that higher interest rates is placing on borrowers of bank loans when it maintained both the base rate at 11.5 per cent and the Kenya Banks Reference Rate at 9.87 per cent during last month’s monetary policy committee meeting.

The combination of CBK restraint in the primary markets and the Treasury’s revision of domestic borrowing are likely to be welcomed by economists, who have called for fiscal consolidation in order to rein in interest rates.

The author is a Kenyan Certified Investments and Financial Analyst and Actuarial Science Graduate, he is also a passionate and Africa-focused Corporate Banker. He can be reached at augustinengare@gmail.com