Effect of Monetary Policy Instruments on Stock Market Returns at Nairobi Securities Exchange

Abstract

The purpose of this study was to investigate the effect of Monetary Policy Instruments on Stock Markets in Kenya specifically at The Nairobi Securities Exchange Market using annual data from 1998 to 2012. Causal Research Design was used to analyze data using Statistical Product and Service Solutions (SPSS). The software was run using three monetary policy variables including treasury bill rate, Money Supply(M1) and consumer price index (proxy for inflation) on the Stock Market Returns (proxied by NSE 20 share price index). The general result of the analysis showed a strong correlation between monetary variables and Stock Market Returns. All the explanatory variables are positively related to Stock Market returns except treasury bill rate which has a negative relationship with stock market returns. Increase in CPI and Money Supply M1 causes a corresponding increase in Stock Market returns whereas an increase in Treasury Bill Rate causes a decrease in Stock Market Returns. The study has revealed that monetary policy has made significant influence over the prices of ordinary equities in Kenya and thus effectively on the returns. This implies that the equities market has significantly absorbed the monetary policy impulses and therefore the project confirms earlier studies done on the same topic regarding effect of Monetary policy on stock markets. It would be important therefore to consider monetary variables as an important factor in determining stock market movements. Utmost care should be taken in designing monetary policies as it has a direct impact on cash inflows into the capital market and on the stability of the capital market and as such policy makers need to be aware of the need to encourage investors.