Encryption allows you to change the master password without forcing you to change all site passwords. To illustrate:

Scenario A: keyfile is encrypted with master password, site passwords are generated from plaintext keyfile. If the master password needs to be changed, the keyfile is simply encrypted again. The plaintext keyfile remains the same, which means all generated passwords remain the same. No need to change site passwords.

Scenario B: keyfile is not encrypted, both keyfile and master password are used as inputs to generate passwords. In this scenario, any change to the master password causes all generated passwords to change. This would obviously be undesirable.

The point is to decouple the master password from the generated passwords. The file can contain as much key material as you want, so it's stronger than any password you can remember.