| dc.description.abstract | Low stable inflation is virtually the main policy objective for most of the Central Banks around
the world pursued in the context deregulated interest rate regime, globalization and rapid
adoption of modern information and communication technologies. As a result, the interest rate
channel of monetary transmission mechanism has attracted much more attention than ever
before.
This study deals with the interest rate pass-through, which is defined as the degree and the speed
of adjustment of retail bank rates to monetary policy interest rate, in all Kenyan banks (large,
medium and small banks). The effectiveness of inter
est rate channel in economy is quantified by analysing the pass-through of policy interest rate
changes to retail banking rate and loan and
deposit volumes. Short term money market rate has been used as a proxy for the policy rate and
various deposit and loan rates of different maturities together with volumes have been used for
analysis. Unit root, autoregressive distributed lag
model and error correction modelling is applied
on the monthly data set (2003-2014) to find the short-run and long-run relationship between the
interest rates.
Results indicate that small banks have the most effective interest rate transmission mechanism,
followed by medium then large banks. The low level
of interest rate pass-through for large banks
can be attributed to the high banking sector competition and high switching costs. The mean
adjustment lags indicate that, changes in policy interest rate are not fully and frictionlessly
transmitted to retail bank interest rates. These results suggest the importance of adopting forward
looking approaches by the Central Bank in order to
appropriately integrate the estimated lag
period required for policy actions to affect the objectives of the Bank. | en_US |
