Nairobi — The private sector is likely to benefit from cheap financing as too much liquidity in the economy continues to drive down the interest rates.

In the latest auction of the short-term Treasury Bill, the Central Bank of Kenya sold the 91-day paper at 1.8 per cent, a drop of 83 basis points from the last auction's 2.6 per cent, hitting levels last seen in mid 2003.

During the auction, the banking regulator was seeking Sh4 billion but received bids totalling Sh9.2 billion, representing a 231 per cent subscription rate.

"The return on investment is not good and this is a sign that the interest rates are likely to bottom out," Mr Steve Langat, a forex dealer with CfC Stanbic, said in the wake of country's inflation falling from 3.9 per cent recorded in May to 3.2 per cent last month.

The head of fixed income at Bank of Africa Duncan Kinuthia said whatever is happening in the market is short-term as banks look out for new products to invest the excess money.

"Inflation is no longer a problem and what most investors are looking out for are opportunity costs," said Mr Kinuthia.

Analysts attributed the drop in the interest rate to the high liquidity in the economy, a situation that may result in more lending to consumers and corporate clients.

They said the banks are likely to start lending more if the risk environment improves and this will spur economic growth.

Mr Langat said, with the rates in Kenya being the lowest in the East African region, local businesses could utilise the opportunity to fund expansion of their operations.

"Banks could start offering more personal loans and credit cards besides lending to corporate clients and industries," said Mr Kinuthia.

This is in line with the industry regulator's objectives, which have seen CBK governor Prof Njuguna Ndung'u pushing commercial banks to lower their rates to lend more to the private sector in a bid to stimulate economic growth.

But the low rates will depend on how CBK manages the economy because even a slight sign of volatility could see them rising again.