In Kenya, interest rates were determined by the market forces without any government intervention for several years. The government's attempt to impose interest rate caps in 2001 failed. For a long period of time Kenyan banks enjoyed higher interest rates and made great profits from interest rate margins, in which banks charged inflated loan rates while reimbursing low savings rates. The law limiting the maximum lending rate to 4% above the central bank rate (CBR) and the minimum deposit rate to 70% received presidential assent and went into effect in September 2016. Proponents of interest rate caps argued that lowering interest rates would increase the economy's money supply, create financial inclusion for lower-income groups, and result in increased economic growth. The goal of this study was to assess the role of interest rate caps on key macroeconomic variables with a specific focus on economic growth rate, unemployment rate, and inflation rate. Data was collected on a quarterly basis and analyzed for a total of 28 quarters, 14 before the interest rate cap (Q1 2013 to Q2 2016) and 14 during the interest rate cap (Q3 2016 to Q4 2019). Data was sourced from the Central bank of Kenya, World bank and the Kenya National Bureau of statistics portals. The study employed a descriptive research design, and the ttest of paired samples was applied in the analysis. The study was undertaken to determine whether there was a significant difference in the means of the chosen variables before the law was implemented and during the time it was in place. SPSS analysis program was applied in the data analysis. The outcomes of the investigation indicated that there was a considerable difference in the means of unemployment rate between the two time periods. However, the difference in the means of the economic growth rate and the inflation rate for the two time periods studied was not statistically significant. The conclusion drawn from these observations is that the government's interest rate regulation was ineffective because it resulted in increased unemployment while economic growth and inflation rates changes were negligible. As evidenced in 2019, the failure of the interest rate ceilings led to the repeal of the law, so the government and Central bank policy makers should learn from the experience and in future should find alternative strategies for regulating the performance of these macro-economic variables.

show more