Background: Economic theory suggests that monetary policy through interest rates
affects bank profitability. There is limited empirical evidence on the
relationship between monetary policy and profitability of commercial banks in
Uganda. Objective: This study seeks to examine the effect of monetary
policy on the profitability of commercial banks in Uganda. Methodology: The study adopts a causal relationship research design. Data, covering 9 years from 2010-2018, was collected from all the
registered commercial banks which were in operation over the study period.
Various monetary policy variables are included in the empirical model as
predictor variables. Return on Assets is used as a measure of bank profitability. A dynamic two-step System Generalized Method of Moments panel
estimator is applied to estimate the empirical model. Findings: Estimates show that monetary policy in terms of its link to the lending ratehas a significant causal
effect on Return on Assets, suggesting that interest rate changes predict bank
profitability of commercial banks in Uganda.Further, resultsshow that a rise in core inflation has a significant
negative causal effect onthe banks’ profitability and that there is a
significant lagged effect of Return on Assets.The 91-day treasury bill rate and money supply were insignificant in predicting bank profitability.
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