Effect of disaggregated inflation components on the Central Bank Rate in Uganda: an ARDL approach

Abstract

This study examined the effect of disaggregated inflation components on the Central Bank Rate (CBR) in Uganda using monthly data from August 2017 to January 2026. Specifically, the study investigated the influence of core inflation, food crops inflation, and energy, fuel and utilities (EFU) inflation within an Autoregressive Distributed Lag (ARDL) framework. The analysis included descriptive statistics, correlation analysis, unit root tests, ARDL estimation, diagnostic tests, and a robust Unrestricted Error Correction Model (UECM). The findings indicate that none of the three inflation components had a statistically significant independent long-run effect on the CBR. However, the COVID-19 structural shock significantly influenced short-run monetary policy decisions, while the negative and significant error correction term confirmed a stable longrun relationship and an adjustment speed of approximately 10% per month. The study concludes that the Bank of Uganda responds more to broad macroeconomic conditions and major structural shocks than to individual inflation components, and recommends a more holistic approach to monetary policy formulation.