The money supply in the economy has a major effect on both the level of economic activity and the rate of inflation. The level of money supply is controlled by the CBK.

 If the CBK wants to stimulate the economy, it increases the money supply. The initial effect of such an action is to cause interest rates to decline but this may also lead to increase in expected rate of inflation which in turn pushes the interest rates up in the long run. The reverse of this would happen if the CBK tightens the money supply in the economy.


During periods when CBK is directly interfering with the market, the yield curve will be distorted. S.T interests will be too high if the banks are tightening their credit and they could be too low if the banks are easing the credit.