Why are Lending Rates Sticky? Investigating the Asymmetrical Adjustment of Bank Lending Rates in Uganda

Abstract

ABSTRACT We investigate the drivers of the asymmetrical response of lending rates to changes in the policy rates in Uganda. The analysis is based on panel error correction methods on Ugandan bank-level data over the period 2009–2017. Results confirm that lending rates are sticky downward. The factors associated with the asymmetrical response of interest rates to policy rates include the following: risk, cost, the level of bank capitalization, banking sector concentration, and government borrowing. These results provide new insights necessary for the design of appropriate policy measures to reduce the high and sticky lending rates.