The Central Bank of Kenya has won round two in the fight to keep interest rates down.

In what might also transmit to a reversal of recent hikes by commercial banks of their lending rates, the Government's credit auction has over the past few weeks recorded an increased subscription and an equal downward pull on the interest rates.

This counterchecks a trend that has since March 2008 put CBK under pressure in raising credit from the public due to low subscriptions coupled by the demand for high interest rates by banks.

"Following a long period of underbidding in the Treasury Bill market, those holding investible funds have returned to buying government paper bringing more than the funds required and thus driving the rates down," a statement signed by CBK governor Prof Njuguna Ndung'u said.

In mid July, Central Bank looked to have lost the war, with interest rates on the 91 and 182-day Treasury Bill going past 30 and 70-month highs respectively.

Commercial banks soon followed, reviewing their lending rates upwards and blaming high interest rates on Government auctions and high inflation. That has now changed.

"The latest indication is that the market is reverting to normal operation after the turbulence brought about by the Safaricom initial public offering (IPO)," the statement said.

Unlike on June 25, 2008, when the subscription levels were at their lowest with Treasury bonds (50.3 per cent) and Treasury bills (35.8 per cent), the past three weeks have seen the performance hit 100 per cent.

Last week, the auction recorded a staggering 278.6 per cent performance against the previous week's 171.3 per cent.

With improved liquidity, interest rates have started to recede with the 91-day Treasury Bill dropping 110 basis points to 8.1 per cent from the previous week's rate of 8.21 per cent and further putting pressure on banks to ease off.

The 182-day Treasury Bill dropped past nine per cent, losing 229 basis points to settle at 8.95 per cent from a high of 9.15 per cent.