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All other rates should flow the direction of bank rate if it is changed. This will not be the case if commercial Banks maintain reserves of their own therefore their dependence to borrowing from Central Bank may be very minimal.
For the changes in the bank rate to cause changes in all other rates, a well organized money market is needed, this is not so in developing countries like Kenya and the changes in the bank rate is not reflected in other rates.
For the successful contracting of the credit policy the businessmen must be responsive to changes in the rising rate of interest however empirical studies have shown that rate of interst does not exercise a strong influence on borrowing for investment and other purposes. It true that where there is need to achieve desired effect, Demand for credit by businessmen also depends on the economic situation.
In case of a severe depression and prospects of making profits are bleak enterprenuers will not invest even though the lending rates have been reduced.
Kavungya answered the question on March 26, 2019 at 05:51