Serrari Group

Fixed Deposit Returns Outpace Inflation in 15 Months; Banks Offer Savers Higher Rates Amidst Competition

In a significant financial development, the return on fixed deposits has surged ahead of inflation for the first time in 15 months, signaling a competitive battle among lenders for long-term funds. Data recently released by the Central Bank of Kenya (CBK) reveals that banks offered customers an average interest rate of 8.1 percent for long-term deposits in July, surpassing the monthly inflation rate of 7.3 percent.

This marked shift has led to a positive real interest rate of 0.8 percent, a stark contrast to the negative returns observed over the past year and a quarter. Inflation, which measures the cost of living and the erosion of purchasing power over time, had been on the rise, hitting a 65-month high of 9.6 percent earlier due to geopolitical tensions. However, a drop in food prices, driven by improved weather conditions and an increased supply of maize and vegetables, has since alleviated inflationary pressures.

The last time Kenya witnessed a positive real interest rate of 0.11 percent was in April of the previous year before the global supply chains were disrupted by the Russian-Ukraine conflict, leading to elevated inflation rates in emerging economies.

The surge in returns on fixed deposits can be attributed to banks’ efforts to attract substantial deposits for lending to both businesses and the government. Notably, government securities have reached record-high interest rates, with the National Treasury successfully raising Sh222 billion since May through multiple reopening of short-term bonds with maturities ranging from two to five years, offering banks lucrative returns of nearly 18 percent.

In July, commercial banks raised their base lending rates for the seventh consecutive month, closing the month at 13.5 percent, aligning with CBK rate hikes driven by the increasing yields on government bonds. This shift indicates more expensive credit for borrowers.

However, the greater returns on fixed deposits primarily benefit fund managers and large institutions, who are the predominant investors in these accounts. Retail depositors generally favor call or short-term deposits due to the significant disparity in interest rates between the two.

Kenyan banks typically offer two types of deposit accounts: call deposits and time deposits, with substantial differences in the interest rates available for each. The current trend highlights a dynamic environment in the country’s financial sector as institutions vie for the attention of savers and investors.

As the financial landscape continues to evolve, both lenders and depositors must navigate this changing terrain to optimize their financial strategies.

Photo Source: Google

September 18, 2023
Delino Gayweh
Serrari Financial Analyst

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