Treasury bill investors sought returns of up to 9 percent in the latest government securities auction, even after the Central Bank of Kenya (CBK) maintained its benchmark lending rate at 8.75 percent, signalling confidence that inflationary pressures will ease in the coming months.
Yields on all three Treasury bill tenors increased as investors demanded greater compensation amid rising inflation concerns linked to the ongoing conflict involving Iran. In the latest auction, the 91-day T-bill rate rose to 8.7 percent from 8.55 percent, while the 182-day and 364-day papers climbed to 8.6 percent and 8.87 percent respectively.
Investors sought average yields of 8.76 percent on the three and six-month securities and 9.1 percent on the one-year paper. However, the CBK rejected some of the costlier bids to contain a steeper rise in short-term borrowing costs.
The demand for higher returns came despite the regulator’s view that inflation will remain within its target band of 5 percent, plus or minus 2.5 percentage points. Kenya’s headline inflation rose to 6.7 percent in May from 5.6 percent in April and 4.4 percent in March.
Following last week’s Monetary Policy Committee meeting, CBK Governor Kamau Thugge said policymakers opted to leave the base rate unchanged as they monitored developments in the Middle East, mirroring the cautious approach adopted by several major central banks globally.
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According to Dr Thugge, inflation is expected to remain within the target range over the near term, assuming tensions in the region ease. He projected that inflation could peak at about 7.2 percent in February 2027 before moderating.
The CBK’s decision to hold rates steady was also influenced by the nature of the current inflationary pressures, which are largely driven by rising fuel and imported goods prices rather than excessive domestic demand.
Typically, central banks raise interest rates to curb inflation by reducing money supply and slowing consumer spending. However, such measures are generally more effective against demand-driven inflation. In the current environment, where price increases stem largely from external supply shocks, tighter monetary policy is unlikely to significantly lower costs.
Nonetheless, investors have sought higher yields to protect the real value of their returns from inflation. Many have also shifted towards shorter-term securities, particularly the 91-day Treasury bill, to retain flexibility should interest rates rise further.
The latest auction reflected this preference, with bids for the 91-day paper reaching Sh32.83 billion against a target of Sh4 billion. The CBK accepted Sh26.86 billion of these offers. In contrast, the 182-day and 364-day bills attracted bids of Sh4.4 billion and Sh2.14 billion respectively, both falling short of their Sh10 billion targets. The CBK accepted Sh3.9 billion from the six-month paper and Sh1.9 billion from the one-year security.
