Monetary policy, macro-economic indicators and economic growth of Uganda

Abstract

The study examined the effect of monetary policy on economic growth in Uganda, with a mediating role of macroeconomic indicators. The study focused on assessing the effect of monetary policy on economic growth in Uganda, evaluating the effect of monetary policy on macroeconomic indicators in Uganda, examined the effect of macroeconomic indicators on economic growth in Uganda and established the mediating effect of macroeconomic indicators on the relationship between monetary policy and economic growth in Uganda. The study employed explanatory research design with a quantitative study approach which involved collecting secondary data from 1986-2024 from Bank of Uganda reports and world development indicators. Data was analyzed using the statistical package for social science (SSPS Version 27). The study revealed that monetary policy instruments, particularly the central bank rate (β = 0.945, p = 0.025), have a strong and statistically significant positive effect on economic growth in Uganda, while the rediscount rate (β = -0.960, p = 0.729) and the bank rate to commercial banks (β = 0.119, p = 0.015) showed weak or insignificant influence. Macroeconomic indicators also play a crucial role, with lending rates (β = -0.551, p = 0.015) and exchange rates (β = -0.211, p = 0.023) negatively affecting growth, whereas inflation (β = 0.190, p = 0.033) contributes positively. In shaping monetary policy, lending rates (β = 1.144, p = 0.002) and inflation (β = 0.366, p = 0.028) emerged as the most influential predictors, while broad money supply and exchange rate had minimal impact. Importantly, macroeconomic indicators were found to partially mediate the relationship between monetary policy and economic growth, with a significant indirect effect (β = 0.251, p < 0.05), confirming their role as transmission channels in Uganda’s economic framework. The study recommends a strategic focus on central bank rate adjustments as the most effective monetary policy tool for stimulating economic growth in Uganda. It emphasizes the importance of maintaining moderate inflation to support healthy demand, while advocating for reduced lending interest rates to encourage private sector investment and household consumption. Strengthening exchange rate management is also advised to minimize volatility and its negative impact on growth. Finally, the study highlights the need to integrate macroeconomic indicators into monetary policy design, ensuring that decisions are data-driven and responsive to key economic trends for improved policy effectiveness.

Subject Keywords: Monetary policy; macro-economic indicators; economic growth; Uganda