The impact of monetary policy on bank lending rate in Kenya and the signaling effect on the international investment community.

Abstract

Monetary policy is an activity of The Central bank to control the availability of money and credit in a country’s economy Cecchetti, (2009). Tight monetary policies raises the nominal interest rate and inflation and reduces long run output such as the supply of bank loans, leading to a rising lending rate, thus discouraging bank-dependent borrowers activities. In the condition of easing, more liquid money is available for banks, thus as the supply of money increases the interest rate decreases. The main objective was to examine the impact of Monetary Policy Instruments on Bank lending rates in Kenya and its trickledown or signaling effect to the international investor community. The study adopted a causal-comparative research design and used Secondary quarterly time series data for the time period 2000-2014. The study revealed that Central Bank Rate and Treasury Bill Rate were both positive and significant Monetary Policy instruments in explaining both bank lending interest rates and the signaling effect to the international investor community. Reserve Requirement was found to be a negative and insignificant Monetary Policy tool in impacting Bank’s Lending Rates and signaling the International Investor community. The study recommends that the Central Bank of Kenya should adopt the TBR and CBR more in their efforts of implementing the Monetary Policy Committees decision. The policies will also play a more regulatory and active role by ensuring that they are a first measure for trying to maintain economic stability and run away depreciation of the Kenyan shilling.