Trend analysis of the effect of Central Bank rate on inflation

Abstract

Inflation in Uganda is a continuing challenge facing Ugandans, and the government of Uganda. Uganda saw its highest inflation rate since 2010 in 2011 when it was 23%. To control inflation, the government of Uganda through the Central Bank uses a number of contractionary policies. The most used policy is Central Bank rate. The Central Bank rate controls inflation by controlling the amount of money that people have access. The Central Bank Rate increases or decreases the interest rate on the amount of money it loans to commercial banks causing commercial banks to raise interest rates on loans they provide to the public. This limits the number of people taking loans. This study seeks to analyse the impact of inflation it has had Central Bank Rate. The study had the following objectives the trend of inflation in Uganda (July, 2011 – March, 2021), examining the stationarity of CBR in Uganda (July 2011- March, 2021), and lastly establishing the relationship between inflation and central bank rate of the same period. The study used secondary data that was collected from both UBOS where inflation rate was collected for the analyzed years and CBR was collected from Central Bank. The study used a number graph technique to show the trend of inflation in Uganda since July, 2011 to March, 2021. ADF test was used to analyse the stationarity of CBR and lastly cointegration and correlation analysis were used to analyse the relationship between CBR and inflation rate. Uganda’s inflation between 2011 and 2021 has been highest during the Month of September, 2011 (22.8%) while lowest in February 2013 (2.1%). The inflation rate has had a drastic increase in 2013, 2016 and 2017 though it did not go beyond 8.0% at all those occasions. It has been further found that CBR between that time period was stationery. It was found that there is a significant relationship between CBR and inflation rate. There is need to further diversify the methods used to control inflation, this will help to relieve the pressure from the CBR. This could include use of reserve requirements in managing the country’s money, curtailing government expenditure.