Central Bank Rate, 91-Day Treasury Bill Rate and Stock Returns at the Nairobi Securities Exchange, Kenya

Purpose of Study: This study compared the relationships between the Central Bank Rate (CBR) and stock returns, and the 91-day Treasury bill rate and stock returns at the Nairobi Securities Exchange (NSE), Kenya. It also examined the Granger causal relationships between each interest-rate measure and stock returns. Methodology: The study adopted an explanatory research design and positivist philosophy. Monthly secondary time-series data covering January 2016 to December 2025 were obtained from the Nairobi Securities Exchange and Central Bank of Kenya. Autoregressive Distributed Lag (ARDL) bounds testing and Toda–Yamamoto Granger causality analysis were conducted using Stata 2013. Findings: The ARDL bounds tests established long-run equilibrium relationships in both models. The Central Bank Rate exhibited a significant positive long-run relationship with stock returns (β = 0.0085, p = 0.011) and a significant short-run effect at the third lag (β = 0.0479, p = 0.008). Bidirectional Granger causality existed between the CBR and stock returns. Conversely, the 91-day Treasury bill rate had no statistically significant individual effect on stock returns in either the long run (β = 0.0015, p = 0.420) or short run (β = −0.0209, p = 0.148). No Granger causality was established in either direction between the Treasury bill rate and stock returns. Conclusion: The study concludes that the relationship between interest rates and stock returns at the NSE differs according to the interest-rate measure used. The CBR demonstrated significant long-run and short-run relationships with stock returns, whereas the 91-day Treasury bill rate did not. Monetary policymakers should promote policy-rate stability and clear communication when adjusting the CBR.