The Impact of the Central Bank of Kenya Rate [CBR] on Commercial Banks’ Benchmark Lending interest rates
Abstract
This research project uses a geometric lag regression approach to identify the effects
of the Central Bank Rate (CBR) on the Kenyan financial system. This forms the first
stage of the interest rate channel of the monetary transmission mechanism, with the
second stage explaining the propagation of monetary policy from the financial
markets to the real economy. The results indicate that a change in the monetary policy
has a significant effect on the money market rate. The change is then propagated
through the money market to the commercial banks’ loan rate market.
Chapter one gives a historical background of the monetary transmission mechanism,
the process by which monetary policy actions influence the economy. A contribution
to the literature is provided in terms of a balance between theory and the more
technical aspects to the implementation and the transmission mechanism of monetary
policy. Contributions to the literature are provided by the findings presented within
chapters two, three, and four.The responsiveness of the commercial banks’ lending rates is assessed by regressing the lending rate (L) against a 3-month lagged CBR and a 3-month Lagged Money Supply growth rate (M2), with the commercial lending rate as the dependent variable.
In addition to the 3-month lag period the same model was applied to test for CBR
responsiveness assuming a 6-month period so that if the responsiveness was not
captured with a 3-month lag it would be visible in the 6-month lag failure to which the
monetary policy tool could be deemed ineffective within a reasonable time frame.
Citation
Masters in Business AdministrationSponsorhip
The University of NairobiPublisher
School of Business