The Effect of Changes in Interest Rates on the Performance of the Nairobi Securities Exchange

Abstract

The research project reviews the effect of changes in interest rates as on the performance of the Nairobi Securities Exchange (NSE). The interest rates used in the study are the 91 and 182 Treasury Bill (TB) rates while the stock market performance is measured by changes in the NSE 20 share index (NSE 20) and the NSE all share index (NASI). A number of studies have been carried out on the impact of various macroeconomic variables on the stock market performance with varying results. The impact of the different variable is included in the analytical model for this study which includes a number of variables such as changes in exchange rates, changes in money supply and changes in inflation. The inclusion of the variables was also important to reduce the unexplained variables in the model. Use of the 91 and 182 day TB rates was designed to assess whether the term of the TB rates had an impact on the stock market performance and whether any such changes were influenced when the review was restricted to the more active counters as measured by the NSE 20 or the changes impacted the entire stock market as measured by the NASI. The data for the study was sourced from Nairobi Securities Exchange for the stock market performance and from the Central Bank of Kenya website for the other macroeconomic indicators. The analysis was conducted using the multiple regression analysis using the NCSS 11 statistical analytical model and the results were also tested for Granger causality using Eviews statistical software. The results indicate that changes in the macroeconomic variables selected with the exception of inflation did not have a significant impact on the stock market performance and that the impact of changes in TB rates was marginal. Further, the causality test results indicated that changes in the TB rates did not causes changes in stock market performance. The results of the study suggest that the expansionary monetary policy adopted by the Government especially through borrowing to sustain increased government budgets has not had a significant impact on the stock market performance. It is therefore important for additional research into the real influences of changes in stock market performance to provide policy makers with a good basis for making policy decisions that will assist to grow the securities market.