Assessing the macroeconomic determinants of interest rates in Uganda: Using monthly data for the period 2000-2019

Abstract

The lending rate (interest rate) at which commercial banks adverse loans to the public significantly affect borrowing in the economy. This greatly influence the economic growth and development and thus the need to assessing the macroeconomic determinants of lending rate in Uganda. Specifically, the study assessed the effect of central bank rate, deposit rate, money supply and exchange rate of the lending rate. Secondary data from Bank of Uganda concerning the above micro determinants was used and analysis was done at univariate, bivariate and multivariate in STATA. The mean lending rate from 2000 to 2018 was 21.24%, on average exchange rate was 2368.61 Ug.Shs to US $. About the bank rate its mean was 14.94% and regard to money supply the means were Ug Shs 8886.29 and 6450.39 billion for M3 and M2 respectively. Mean trade balance was -128.60 and the median external debt service was 9.40 million US $. At bivariate, lending rate had a significant positive relationship with exchange rate, bank rate, money supply and a negative one with trade balance. At multivariate, a linear regression model showed that lending rate was only significantly determined by bank rate and external debts service Finally, for the government to encourage borrowing in the economy, it should reduce on the bank rate, which in turn lowers the lending rate of the commercial banks.