The committee then voted to increase the policy rate, the central bank rate, by 50bps to 8.75%. Despite the hike in the policy rate, the committee is way behind the curve, given developments in the global economy.
Strictly speaking, monetary transmission mechanisms describe how policy-induced changes in short-term interest rates, or the nominal money stock (and its components), impact on variables, such as output, prices, lending rates, the exchange rate and stock market prices.
In Kenya, previous empirical literature has identified four money policy transmission channels: interest rate, credit, exchange rate and asset prices.
All these four channels have been subjected to empirical tests to determine their impacts on output and prices, and the results have shown that the exchange rate channel bears statistical significance (which is appropriate for a small, open economy such as Kenya).
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