Inflation-adjusted returns drop sharply on lower rates

The drop off in inflation adjusted returns means that Kenyans are earning less from their Treasury investments at this time than they did a year ago as both nominal interest rates and inflation adjusted returns plummet.

Inflation adjusted returns are reached by subtracting the rate of inflation from the effective rate of return earned off an asset and are also referred to as the real yield.

According to analysis of inflation adjusted returns by this publication, which compares the monthly headline inflation rate to the end of month return from the 364-day or one year Treasury bill, the real yield fell from a peak of 13.2399 percent in September 2024 to 5.6178 percent at the end of July.

The return on the 364-day Treasury bill stood at 16.7999 percent in September 2024 while inflation was lower at 3.56 percent.

In July 2025, the return on the one-year paper closed at 9.7178 percent against a higher rate of inflation at 4.1 percent, implying a narrower real yield.

Returns from government paper have dropped considerably since October last year with the Central Bank of Kenya (CBK) moving to normalise its policy rate by cutting its benchmark rate.

The CBK has cut its reference rate also known as the Central Bank Rate (CBK) on six consecutive policy meetings, leaving the benchmark at 9.75 percent as of June 2025 from a high of 13 percent in August.

Analysts have attributed the fall in interest rates to the impact of the CBK rate cuts over the last year.

“We notice from our analysis of interest rate movements since the beginning of 2024. A significant decline in T-Bill rates especially since October 2024 following CBR revision from 12.75 percent to 12 percent and subsequent downward revisions through to June 2025 have resulted in the gradual declines as well,” analysts at Sterling Capital said in a July fixed income report.

“The 91-day, 182-day and 364-day papers recorded average rates of 8.21 percent, 8.51 percent and 9.84 percent in the month of June 2025 compared to 8.37 percent, 8.59 percent and 10 percent in May.”

Inflation has meanwhile picked up in recent months lifting the floor from which the real yield is computed amid falling interest rates.

Kenya’s annual inflation rose to a three-month high of 4.1 percent in July 2025 with upward pressure coming from prices of food and non-alcoholic beverages, transport, housing and utilities.

“The increase in price was mainly driven by a rise in prices of commodities in the food and non-alcoholic beverages category (6.8 percent) transport (4.1 percent) and housing, water, electricity, gas and other fuels (1.3 percent), over the one-year period,” the Kenya National Bureau of Statistics (KNBS) said in a report published last week.

During the month of July, the cost of a litre of petrol and diesel jumped by Sh8.99 and Sh8.67 respectively to retail at Sh186.31 and Sh171.58 in Nairobi.

The rise in fuel prices, which usually impacts food and energy costs, is expected to continue impacting the rate of inflation in coming months.

An expected surge in domestic borrowing by the government is however seen to exert pressure on domestic interest rates resulting in a likely scenario where interest rates rise again, increasing the chance for a higher real yield by investors.

According to global credit rating firm Moody’s, the reliance of the government on the domestic markets for financing is likely to tip the scales on the cost of debt.

“Kenya will rely predominantly on the domestic market to meet its fiscal needs with approximately two-thirds of its financing, or just under four percent of GDP per year, from domestic sources,” Moody’s said.

“While domestic financing conditions have improved, this reliance will continue to weigh on debt affordability, a key constraint in Kenya’s credit profile.”

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