Effects of the central bankrate, inflation and commercial bank lending rate on GDP in Uganda. A quarterly timeseries analysis (2017-2025)

Abstract

This study examined the effect of the Central Bank Rate (CBR), inflation and commercial bank lending rate on Gross Domestic Product (GDP) in Uganda using quarterly time-series data covering the period from 2017 to 2025. The study was motivated by the need to understand the effectiveness of monetary policy transmission and its influence on economic growth in Uganda. Secondary data were obtained from the Bank of Uganda (BOU), Uganda Bureau of Statistics (UBOS), International Monetary Fund (IMF), and the World Bank. The study employed the Autoregressive Distributed Lag (ARDL) bounds testing approach because the variables exhibited mixed orders of integration, I(0) and I(1). Descriptive statistics, correlation analysis, Augmented Dickey-Fuller (ADF) unit root tests, ARDL bounds testing for cointegration and diagnostic tests were conducted using Stata 17. The findings revealed the existence of a long-run equilibrium relationship among GDP, the Central Bank Rate, inflation and commercial bank lending rate. The ARDL bounds test produced an F-statistic of 5.237 which exceeded the upper critical bound at the 5 percent significance level, confirming cointegration among the variables. The long-run estimates showed that the Central Bank Rate had a negative effect on GDP (β = -0.1124), inflation had a negative effect on GDP (β = -0.0821), and the commercial bank lending rate had the strongest negative effect on GDP (β = -0.6247). The commercial bank lending rate emerged as the most influential monetary variable affecting economic growth in Uganda. The study concludes that increases in interest rates and inflation reduce economic growth in the long run, with commercial bank lending rates exerting the greatest impact on GDP. The study recommends policies aimed at reducing commercial bank lending rate spreads, strengthening monetary policy transmission mechanisms and enhancing coordination between monetary and fiscal policy to promote sustainable economic growth in Uganda.