Assessing the effect of the central bank rate on the commercial bank interest rates
Kakeeto, Micheal W.
MetadataShow full item record
This study aims at analyzing the effect of the Central Bank Rate (CBR) on commercial bank interest rates in Uganda. Using secondary time-series monthly data covering the period from 2018 to 2022, this study analyzes the relationship between the Central Bank Rate and commercial bank interest rates in Uganda. In addition, the dissertation examines the short-run and long-run effect of CBR on the commercial bank interest rates controlled for the corresponding Inflation rates in the period of analysis. Relevant literature in the research study by various scholars including relevant theories was also cited as shown by Chapter two. Furthermore, the chapter documents that commercial banks’ lending rates are significantly influenced by other key macroeconomic factors such as economic growth rate, fiscal policies and the exchange rate of Uganda’s shilling with major currencies. To achieve the required objectives, correlation and regression analysis were used. Specifically, the ARDL model was used to examine both the short-run and long-run effects of the CBR and the Inflation rates on the commercial bank interest rates taking care of the lags of the independent variables. In addition, descriptive analysis was used to analyze the characteristics of the different variables in the research study. The study finds that the Central Bank Rate has a significant influence on commercial bank interest rates, as expected. Empirical results indicate that an increase in the CBR is associated with a corresponding increase in commercial bank lending rates. The interest rate pass-through from the CBR to the consumer lending rate is moderate but significant. The study also finds that there is both short-run and long-run effects on the commercial bank interest rates by CBR and the Inflation rates. Lastly, the study observes that since the average inflation rates was higher than the average deposit rates in the analyzed period, it was not advisable for the people to keep their money in the banks as they would lose money. The study recommends that there should also be further studies to conduct regional and sectoral analysis of a similar study in order to understand how interest rates vary across different regions and sectors, and whether there are any regional and sectoral disparities in the impact of Central bank rates on commercial bank rates.