Lending interest rate and economic growth in Kenya

Abstract

Interest rates are one of the most important drivers of the economy in that it tends to set the pace for investment markets. For the past decades the debate on interest rate and economic growth has attracted the attention of many researchers in different areas of studies. Economic growth is an important macroeconomic objective for a country. Learning how interest rate changes can influence the market place as well as help an individual understand its impact on their day-to-day life. Decrease in interest rate attracts capital inflows and thus strengthening the local currency (Mishkin, 2010). Conversely increase in interest rates slow economic growth since it reduces the purchasing power of consumers and lessen their desire to borrow. The CBK through the monetary policy and the bank rate has a very strong bearing on the performance of any sectors. This study delved on the effects of interest rate on the general economic growth in order to fill the knowledge lacuna that currently exists. Its aim was to establish the effect of lending interest rate on economic growth in Kenya and the empirical evidences that help answer the research objective. A causal research design was undertaken by the researcher in this study and this was facilitated by the use of secondary data which was obtained from the publications of KNBS and the Central bank of Kenya for a 15 year period starting 2000 to 2014 and the same was regressed quarterly to help answer the research question. The study established that there is a negative relationship between interbank lending interest rate and the economic growth. Interest rate was studied in isolation in an attempt to establish its effect to the economic growth of Kenya. In a nutshell, since lending interest rate has some kind of bearing on economic growth, it’s imperative that the government puts policies in place to control the movements of the same.