Isaya Maana and Samuel Tiriongo
Central Bank of Kenya



This paper examines the effectiveness of monetary policy communication in signalling the direction of short term interest rates in Kenya between January 2007 and January 2010. The analyses focused on monetary policy committee (MPC) press releases as the main channel of communicating policy decisions. The paper used an Exponential Generalized Autoregressive Conditional Heteroskedastic (EGARCH) model to analyse the effects of policy announcements on changes in average weekly interbank interest rates and the 91 day Treasury bill rates. The empirical findings show that, to a large extent, the monetary policy press releases have been effective in signalling the direction of short term interest rates. Nevertheless, there seems to be asymmetry in the effectiveness of the statements, in which statements with loose policy inclination tend to be more effective compared with the statements with tight policy inclination. Results also indicate that reinforcing the policy stance with statements in the intermeeting period such as the Governor’s speeches also tend to have a signalling power particularly in instances when the MPC maintains a neutral stance.