Policy Brief No. 10 of 2004 on Interest Rate Management and Monetary Policy in Kenya

Abstract

The Economic Recovery Strategy (ERS) for the period 2003-2007 emphasizes on the role of the private sector as the engine for economic growth, while the Investment Programme (2003) points out the need to enhance private sector investment. In the ERS, the government emphasizes the need to achieve an interest rate structure that promotes financial savings and ensures efficient allocation of the same. To meet these objectives, bank interest rates should reflect the true cost of capital in order to enhance mobilization and efficient allocation of financial capital. Consequently, management of the liberalized interest rates must be strengthened. The Central Bank of Kenya has the responsibility to manage the liberalized interest rates. However, the effectiveness of doing so depends on operations of the monetary policy and the competitiveness of the financial sector.