Monetary Policy Tools and Lending Rates in Uganda: A Quantitative Analysis
Abstract
This study examines the impact of key monetary policy instruments on Uganda's lending rates over the period from 1994-2024. Specifically, it examines the impact of the Central Bank Rate (CBR), Open Market Operations (OMO), Standing Lending Facilities (SLF), and the Cash Reserve Requirement (CRR) on commercial lending rates. With the Autoregressive Distributed Lag (ARDL) methodology, the study accommodates variables of mixed orders of integration and accounts for both short-run dynamics and long-run relationships. After overcoming multicollinearity problems, which resulted in CRR (being utilized as a proxy for demand deposits) being eliminated from the study, the study determines that CBR and the rediscount rate (being utilized as a proxy for SLF) have positive influences on lending rates in both the long run and short run. On the other hand, base money (proxy for OMO) is not statistically significant, and this reflects structural inefficiencies in the channel of passing through liquidity. Since diagnostic tests confirm the model under stability, normality of residuals, homoscedasticity, and no serial correlation, these findings confirm interest rate-based instruments in Uganda's monetary policy arsenal and simultaneously highlight indirect instrument weaknesses, such as OMO. These policy recommendations drawing from the research focus on reinforcing CBR signaling transparency, upgrading SLF mechanisms, and further deepening financial markets to improve policy transmission. This should be accompanied by further research into the wider macroeconomic effects of these instruments as well as further policy levers in Uganda's monetary framework.
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