The Effect of the Central Bank Rate on Stock Market Performance at the Nairobi Securities Exchange

Abstract

The study sought to determine the effect of the Central Bank rate on stock market performance at the Nairobi Securities Exchange. This study used descriptive research design which relies on observation of occurrences and events so as to develop theories and postulations that explain and elucidate on the observations. Secondary data collected from the Nairobi Securities Exchange website and the Central Bank of Kenya website was used. Data analysis was done using the statistical software, Statistical Package for the Social Sciences (SPSS). A Multiple Linear Regression Model was employed in establishing the effect that the CBR has on the NASI, taking into account the prevailing rate of inflation. Monthly data was used. Significance of the results was tested using the e t-test, F-test and coefficient of determination. The study found that Central Bank Rate has negative effect on stock market performance. Therefore, increase in Central Bank Rate will lead to reduced stock market performance as measured by Nairobi Securities Exchange All Share Index. The study also found that the inflation rate has a negative effect on stock market performance at Nairobi Securities Exchange. Therefore, increase in inflation rate will lead to reduced performance of the stock market performance. The study concluded that Central Bank Rate and inflation rate combined have significant negative effect on stock market performance. Therefore, increase in inflation and CBR will lead to reduced stock market performance. This study recommended that the Central Bank of Kenya and the Monetary Policy Committee to maintain the CBR at reasonable levels. Minimal volatility on the CBR should be maintained so as to reduce the volatility of the stock market performance. The study also recommended that the Central Bank of Kenya through the monetary policy committee to ensure low inflation rates are maintained in the economy