CBK Governor Thugge Says Rising Treasury Bill Yields Won't Affect Rate Cuts

• CBK Governor Thugge says rising Treasury bill yields won't affect rate cuts.
• The alignment between CBR and KESONIA has strengthened monetary policy transmission.
• Rising Treasury bill yields may impact private-sector lending, affecting interest rates and borrowing costs.

Central Bank of Kenya (CBK) Governor Kamau Thugge has reassured that rising Treasury bill yields will not undermine the CBK's efforts to reduce commercial bank lending rates. This assertion comes as banks face increasing pressure on their interest margins due to a prolonged period of monetary easing. According to CBK data, the average lending rate fell to 14.38 percent in June, while the average deposit rate stood at 6.84 percent. Thugge acknowledged that banks' deposit costs have started rising but emphasized that lenders still maintain a profit margin, with the spread between lending and deposit rates remaining above seven percentage points compared to a historical average of about five percentage points.

The CBK has maintained its commitment to lower lending rates and stronger private-sector credit growth as key objectives of its monetary easing cycle. Thugge's comments suggest that the CBK is confident in its ability to transmit monetary policy effectively, despite rising Treasury bill yields.

The alignment of the Kenya Shilling Overnight Interbank Average Rate (KESONIA) with the Central Bank Rate (CBR) has strengthened the link between the policy rate and commercial bank pricing. This convergence is a result of the CBK's efforts to improve monetary policy transmission, which was narrowed from 75 basis points to 50 basis points in February. As a result, 47 percent of lenders now use the CBR as their base rate, while another 34 percent use a combination of the CBR and KESONIA. This shift is expected to translate directly into higher or lower commercial bank interest rates when the time comes for the CBK to adjust the policy rate.

While Thugge downplayed the impact of rising Treasury bill yields on commercial bank lending rates, he acknowledged that banks may be influenced by these yields when deciding where to deploy funds. Government securities offer relatively low-risk returns, which could affect private-sector lending as banks weigh lending to businesses and households against investing in government securities. This development may have significant implications for lawyers advising clients on interest rates and borrowing costs, particularly given the CBK's continued emphasis on lower lending rates and stronger private-sector credit growth.

Lawyers should watch for how this development may impact their clients' interest rates and borrowing costs, particularly in light of the CBK's continued emphasis on lower lending rates and stronger private-sector credit growth.

Source: Original reporting via AllAfrica Kenya