Effects of Exchange Rate, Inflation, and Interest Rates on Tea Exports in Kenya

Abstract

The international tea market exhibits significant price volatility, creating challenges for household incomes, food security, and government revenues in tea-producing nations. As a leading global tea exporter, Kenya faces similar risks due to fluctuations in tea export prices. This study explored the impact of selected macroeconomic variables, namely inflation rate, interest rates, and exchange rates, on Kenyan tea export prices, aiming to understand how these factors influence prices in international markets. Its objectives were to examine the effect of exchange rate changes, assess inflation’s influence, and evaluate the impact of interest rates on tea export prices. Using a quantitative research design, the study analyzed quarterly time-series data from 2000 to 2022, incorporating quarterly dummy variables (with the fourth quarter as the reference) to account for seasonal variation. Descriptive statistics and the Augmented Dickey-Fuller (ADF) test ensured stationarity, while Ordinary Least Squares (OLS) regression estimated the relationships between each macroeconomic variable and tea export prices. Findings indicated that exchange rates and inflation significantly drove short-term price fluctuations, with exchange rate depreciation linked to price changes, and inflation showing a positive same-quarter effect but a negative effect in later quarters, reflecting delayed market adjustments. Interest rates had no significant impact. The study also noted price persistence and seasonal trends, particularly higher price changes in the third quarter. It concludes that stabilizing exchange rates and inflation, especially during high-demand quarters, is crucial for sustaining tea export earnings, while recognizing the influence of unobserved factors on price variability.