Monetary Policy Tools and Inflation in Kenya

Inflation is a critical aspect of every economy and presents a balancing act to most governments through regulatory framework. Inflation can break or break the economy of a nation. Hence policy makers in the government regulating bodies spend considerable time in developing policies aimed at achieving set targets of inflation which are geared to supporting the broader economic objectives of an economy. The Central Bank of Kenya (CBK) has responsibility of formulating and implementing monetary policy to achieve and maintain low inflation. This study set to establish the relationship of monetary policy tools and inflation in Kenya.. The study used time series empirical data on the variables to describe and examine the relationships between monetary policy tools and inflation. The study obtained secondary data on Price Index for inflation, 91-day Treasury bill rate, exchange rate, money supply (M3)and repo rate for a period of five year (2008- 2012). Analysis on the various variables obtained coefficients of correlation denoted as ‘?’ which shows the strength of relationship between monetary policy tools and inflation in Kenya. The study established that inflation and the money supply were positively correlated with each other. The study established that the general level of prices increase with the increase of money supply. The study found that the 91 treasury bill rates have an impact on the level of inflation. The findings of study show that the policy makers need critically evaluate and monitor the levels of money supply in Kenya so as to ensure a stable retail price levels. The findings also support the use 91-day Treasury bills rate in monitoring the level of prices because it has a significant effect on the level of Inflation in Kenya.