pressure as interest rates fall

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The Central Bank of Kenya in Nairobi. Analysts have attributed the declining yields on government securities to monetary easing by the bank. Photo/File  Nation Media Group

By GEOFFREY IRUNGU

In Summary

• The fall in short term rates has created expectations of a drop across the yield curve, which may reduce the attractiveness of Kenya government securities.
• In its analysis, Citibank said it was also expecting the shilling to depreciate slightly in the coming months, to correct an overvaluation.

Falling interest rates on government securities are likely to put the shilling under pressure if they are accompanied by a fall in foreign investor inflows, analysts have said.

Yields on the three-month Treasury bill — which is widely used as the benchmark for indicating direction of interest rates — have dropped by 14.8 percentage points to 5.11 per cent as at last Thursday’s auction.

Interest rates on the 182-day Treasury bills fell to 5.54 per cent in Wednesday’s auction, from 5.64 per cent at last week’s sale.

The fall in short term rates has created expectations of a drop across the yield curve, which may reduce the attractiveness of Kenya government securities

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“The decline in the interest rates may put pressure on the local currency and cause it to depreciate slightly,” said Peter Anderson, the chief investment officer of Old Mutual Asset Managers in Nairobi Thursday.

The widening gap between the exports and imports basket, currently equivalent to 11 per cent of GDP, is also expected to impact on the value of the shilling. Mr Anderson attributed the declining yields to the monetary easing by the Central Bank.

As at Thursday’s opening of markets, the shilling was trading at 86.03 units on average to the dollar, with the interbank market selling at 86.12 units and buying at 85.93. This was a weaker level that in most of the past few weeks.

In its analysis, Citibank said it was also expecting the shilling to depreciate slightly in the coming months, to correct an overvaluation.

“Most forecasts tend to point to a depreciating trend, but only moderately so consensus forecast indicates 89.8 (units to the dollar) in 12 months time and 93.0 units in 24 months time,” said David Cowan, Citibank’s head of research on Africa, in a note to clients.

Mr Cowan noted that there has been an accelerated appreciation since 2009.

“We think that the broad Kenya shilling stability since January 2009, against the background of robust inflationary pressures, has meant that the shilling has become overvalued. Perhaps the sharp selloff in 2011 reflects this and so the overall trend is towards depreciation,” said Mr Cowan

.

He noted that a lot would depend on central bank’s activities, but added that Citi did “not expect a further significant easing of monetary policy.”

The Central Bank Rate stands at 8.5 per cent. Its historical low is 5.75 per cent, reached in early 2011.

In recent times, the CBK has also injected cash into the economy in a bid to force lending rates of financial institutions to come down to power economic growth.