The Response of Kenya’s Construction Industry Output Growth Rate to Central Bank Base Lending Interest Rate (2007 – 2018)

Abstract

Globally, construction industry is viewed as one of the major industries in a country’s economy. Thus, knowledge of the impact that central bank rate bears on the industry shall make management of the industry by the government less challenging and enhance its steady growth and contribution to the gross domestic product in Kenya. This paper is presenting empirical findings indicating how central bank rate (CBR) impacts on construction output growth rate, and how this influences the related policy design and formulation. Time series data analysis method was used to analyze data collected from Kenya National Bureau of Statistics and Central Bank of Kenya. This data covered a period of twelve (12) years from 2007 to 2018. EViews version 7; a statistical software was used for data analysis. Statistical outputs generated graphical analysis, correlation analysis, tests of stationarity and regression analysis. Dependent variable (construction output growth rate) was regressed on the independent variable (CBR); applying the second differences of both CBR and construction output growth rate. Results indicated that CBR had no significant influence on the growth of construction industry in Kenya. A model explaining this outcome was developed which has a coefficient of determination (R2) of 0.08. However, it was observed that these impacts are felt much later after the CBR implementation as demonstrated by a regression model of lagged interest rates which showed R2 value of 0.998. This figure is an indicator that the regression model of lagged CBR has strong explanatory powers and thus it was logical to conclude that (CBR) has an impact on construction industry output growth rate in Kenya. CBR can thus be adopted for policy formulation for purposes of regulating the construction industry in Kenya.