Money Market Funds Interest Rates Are Falling in Kenya. Here’s Why

While stocks and bonds have whipsawed unpredictably, often painfully, over the last year or two, one area of the markets has been blissfully steady: money market funds.

In the last six months of 2024, notably, investors were able to get an average annual percentage yield (APY) of 17.5% on their contributions in this type of mutual fund that primarily invests shareholder funds in low-risk and highly liquid short-term assets such as sovereign bonds or government securities like Treasury bills, bank certificates of deposit, repurchase agreements, commercial papers issued by corporations and other near cash holdings.

However, the golden era for cash in Kenya’s money market funds may be winding down, as money market fund account rates have started dwindling, with MMF portfolios beginning to record lower returns on investments than in previous months, starting from August.

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An analysis done by Business Today shows that since then, for the top money market funds accounts in the country, the effective rate of return for many has reduced significantly, by more than half a percentage point, to a mid-range of about 16-17% APY.

Below is a look at how the rates of the top 5 money market funds have changed as of October 2024:

Best money market rates of November 2024

In general, though, money market accounts offer better interest rates, which are much higher than the national average and the rates offered by interest-bearing bank accounts.

Factors affecting interest rates in money market funds

Money market fund investors need to consider two powerful factors — inflation and short-term interest rates.

Simply, Kenya’s inflation has been dropping for months now, declining to 3.6 per cent in September 2024 from 4.4 per cent in August. This means the prices of most goods and services are relatively stable, and thus, there’s more money circulating in the economy as people have more purchasing power.

More money results in an increased willingness among consumers, businesses, and governments to save, the opposite of when there is a continual increase in the general price level of goods and services (inflation) when individuals take cautious steps to protect their purchasing power. During such times, financial institutions typically raise interest rates to reward savers for deferring immediate consumption despite the strain of higher prices and a weaker economy.

Finally, the influence of the Central Bank of Kenya (CBK) on annual percentage yields (APYs) cannot be overlooked. In its mission to ensure price stability and maximum employment and encourage economic growth within the local economy, CBK is tasked with drafting a monetary policy directive, which sets guidelines for the growth rate of the money supply and establishes interest rate levels, accounting for inflation and other economic factors.

The primary way CBK achieves these goals is by controlling the Central Bank Rate (CBR), the rate at which banks lend to each other overnight through unsecured loans. This rate, in turn, impacts overall financial conditions, influencing the broader economy.

On October 8, 2024, CBK lowered the benchmark rate from 12.75% to 12% when its Monetary Policy Committee met to review the outcomes of its previous decisions aimed at anchoring inflationary expectations and maintaining exchange rate stability in the country. Previously, the rate had been set at 13% since February before declining starting August.

When CBK reduces its key lending rate, it has a cascading effect, causing interest rates in money market funds and other savings accounts to fall to align with the reduction.

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