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(Updates with analyst’s comment in fourth paragraph.)
July 6 (Bloomberg) -- Kenya’s one-year borrowing costs fell from a record high at an auction as the central bank received fewer bids for the debt than the amount offered.
The yield on the 364-day debt retreated to 10.22 percent, the Nairobi-based Central Bank of Kenya said in an e-mailed statement today. It reached 10.249 percent at the previous sale, the highest since the bills were first issued in August 2009. The bank, which offered 5 billion shillings ($56 million) of the debt, received 2.65 billion shillings of bids and accepted 1.2 billion shillings.
The Kenyan government’s borrowing costs surged to a more than nine-year high on some maturities as inflation accelerated to the strongest in more than two years and the shilling weakened to a 17-year low. The central bank increased the overnight lending rate to 8 percent from 6.25 percent to rein in price growth and curb speculation in the shilling, it said on June 29.
“Short-term interest rates have been falling in recent auctions, a situation likely to be seen with this security, as central bank tightening policy drains liquidity in the market and its preference for lower yields remaining a key determinant to investors,” Fred Moturi, a fixed-income dealer at Nairobi-based Sterling Investment Bank Ltd., said by phone before the auction results were released.
The central bank also blocked the use of funds borrowed from the overnight window to trade in the foreign- exchange market. The shilling has strengthened 2.6 percent since the measures were announced.
Inflation is expected to advance further as dry weather in East Africa’s biggest economy curbs agricultural production, central bank Governor Njuguna Ndung’u said on June 6.
Kenya will boost spending by 15 percent to 1.15 trillion shillings in the year through June 2012, increasing spending on roads and energy, Finance Minister Uhuru Kenyatta said in his budget speech on June 8. The deficit will widen to 7.4 percent of gross domestic product. Domestic borrowing is targeted at 119.5 billion shillings in the next financial year, down from 125 billion shillings this year.
The government faces “huge demand” for additional spending to fund implementation of a constitution enacted in August, and to help cope with drought in an economy that is about 25 percent reliant on agricultural production, the finance ministry said in its March 23 budget policy statement.
--Editors: Ana Monteiro, Linda Shen
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