Policy rate ‘works if supported by market activity’ research

By GEOFFREY IRUNGU


The decisions of the Monetary Policy Committee (MPC) have more impact when they are coordinated with the banking industry regulator’s market activities, a research shows.

A paper prepared by Rose Ngugi, an advisor at the International Monetary Fund (IMF) head office in Washington, and Anne Kamau, a researcher at the CBK, concluded that the monetary authority usually attained the desired results when it intervened in the foreign exchange market after MPC meetings.

The effect of MPC action is felt most when the Central Bank of Kenya tightens the monetary policy by increasing the Central Bank Rate (CBR), which is the policy benchmark, over a period of time and then follows up with intervention in the foreign exchange market over several days.

The tightening and subsequent actions enable the market to read the intentions of the monetary authority. The research, titled “Exchange Rate Response to Policy News in Kenya”, was presented last week at a seminar held at the Kenya School of Monetary Studies.