The Effect Of Interest Rate On Kenya’s Economic Performance

Abstract

The main objective of this paper is to examine the effect of interest rate on Kenya’s economic performance where Time-series data from Central Bank of Kenya for the period of 1995-2015 is employed. The methodology employed in this paper includes the descriptive statistics, correlation and regression analysis to examine the effect. The paper establishes theoretical foundations drawn from economic related theories, fisher’s theory and Keynes liquidity theory to design a basic framework for descriptive investigation to the specific case of interest rate and economic performance. The descriptive results shows that there has been a very high volatility in both interest and inflation rates since 1995 and 2005 respectively with interest rate hitting as low as 12.53% and as high as 33.79% while inflation rates hitting as slow as 1.96 % to as high as 16.30%. GDP growth hit the lowest point of -2.14% and the highest of 4.30. Correlation coefficient technique is employed to establish the strength and direction of the relationship between interest rate and economic performance. The results from regression analysis reveals that interest rate has a negative impact on economic performance in Kenya at 5 percent level (r=-0.738, Beta=0.437, t=1.99, p<0.05). Moreover, the paper finds out that the degree of responsiveness of GDP to changes in the interest rate is large. The paper recommends that there is need for the government to control the country’s interest rate as it is found that it negatively affect the economic performance of the country.