Abstract:
Performance of construction output is a pointer to economic wellbeing and thus
requires effective management to maintain its contribution in a country’s growth.
However, in Kenya, there is a research gap on the interaction of construction output
and CBK’s base lending interest rates. This has the potential of limiting the
government’s capacity to effectively manage the construction industry output in
Kenya. This study investigates Kenya’s construction industry output and how it is
affected by CBK’s base lending interest rate. Time series data (for analysis) were
obtained from Kenya National Bureau of Statistics and Central Bank of Kenya. The
data covered a period of sixteen (16) years; from Year 2007 to Year2022, on yearly
basis. The twin variables in this study were construction industry output and CBK’s
base lending interest rate in Kenya. Eviews (version 10) a statistical software
application, was used for data analysis. The statistical outputs generated graphical
analysis, tests of stationarity and regression analysis. Dependent variable
(construction output) was regressed on the independent variable (CBK’s base
lending interest rate); applying the second differences of base lending interest rate
and natural logarithms of the second differences of construction output. Results
showed that base lending interest rates had no significant influence on the
construction industry output in Kenya in the period of the study. A model
explaining this outcome was developed which has a coefficient of determination (R2)
of 0(zero). However, it has been observed that much of the impacts of base lending
interest rate start to be felt much later after their implementation. This is displayed
by a regression model of lagged base lending interest rate which showed R2 value of
0.17. This figure is an indicator that the regression model of lagged interest rate has
explanatory powers and thus it was logical to conclude that base lending interest
rate has an impact on construction industry output in Kenya. This paper presents
empirical findings indicating objectively how the base lending Interest rate impacts
construction output and can be adopted for policy formulation for purposes of
regulating the construction industry in Kenya. Therefore, experts and stakeholders
in the industry are highly advised to factor in this impact in the early stages of
feasibility study and appraisal of construction projects.