INFLUENCE OF INTEREST RATES ON CONSTRUCTION INDUSTRY OUPUT IN KENYA

Abstract

The focus of this paper is on the influence of interest rates on construction output. Construction output is akey indicator of the health of an economy yet lack of empirical evidence on the influence of monetaryinstruments, such as base lending rates has limited the governments’ ability to manage construction output.Empirical evidence is needed to verify claims by industry players, in particular in the housing sector, thathigher interest rates have not dampened construction output in Kenya. Further past empirical work is notconclusive on the direction that interest rate changes influence construction output, with studies suggestingboth a positive and inverse relationship. This research aims to fill this gap in our knowledge on the influencethat interest rates have on construction activity in Kenya. The aim of the research is to answer whether or notwholesale interest rates, such as the CBK base lending rate, can be used as an effective policy instrument toinfluence construction output in Kenya. Questionnaires were administered for primary data. The studyidentified two time series, CBK base lending rates and annual construction output (KNBS data) and a numberof regressions were run using first differences to observe whether a change in the base lending rates alone hada significant influence on construction output lagged by 1, 2, 3, or 4 years. Findings suggest no significantrelationship between changes in rates and the annual change in construction output, regardless of the numberof years lagged. These findings are a departure from conventional wisdom that stimulating constructiondemand via monetary policies is the sure way for enhancing economic growth. This is a valuable finding thatsupports the view that government policy needs to focus on stimulating construction demand, using realprojects rather than monetary policies, such as interest rate manipulation.