Impact of Interest Rates on Economic Growth in Kenya

Abstract

Purpose: To evaluate the impact of interest rate on economic growth in Kenya. Design: The study took an explanatory approach in its research design. Secondary data from World Bank Development Indicators was used for the analysis. Findings: The SVAR results revealed that interest rates have a negative and statistically significant. Impulse response functions (IRF) analysis suggested that increase in interest rate result in short-term decrease in GDP per capita. The forecast error variance decomposition (FEVD) showed that interest rate account for more variability in GDP per capita. All required diagnostic tests proved that the SVAR model is normal, has no autocorrelation and homoscedasticity problems. Value: The study concludes that Kenya’s economic growth is highly sensitive to both monetary and fiscal policy shocks. To promote sustainable growth, Kenya should maintain a stable and growth-friendly interest rate regime, strengthen money supply management through enhanced monetary policy coordination, and improve the efficiency of public spending by prioritizing development-oriented and productive investments.