Bank of Uganda forecasts inflation rise in short-term
Fruit stalls in Nakasero Market. In July last year, core inflation stood at 15.4 per cent, which was higher than Bank of Uganda’s 5 per cent target. PHOTO BY FAISWAL KASIRYE
What you need to know:
High interest of the Shilling denominated loans have pushed some borrowers to foreign exchange denominated loans whose prime lending rates average at about eight per cent.
Bank of Uganda predicts that core inflation could rise in the next four months due to base effects, something that might drive up the cost of living and services.
Speaking in Kampala last week, Bank of Uganda deputy Governor, Louis Kasekende said although core inflation– which excludes food crops, fuel, electricity and metered water which are volatile to price changes – had stabilised at about 5 per cent, there might be a slight increase in the short term because of base effects reflecting the path of the consumer price index at the same time last year.
Base effect
The base effect relates to inflation in the corresponding period of the previous year.
If the inflation rate was too low in the corresponding period of the previous year, even a smaller rise in the Price Index will give a high rate of inflation. But if the price index had risen at a high rate in the corresponding period of the previous year and recorded a high inflation rate, a similar absolute increase in the Price index now will show a lower inflation rate now.
In July last year, core inflation stood at 15.4 per cent, which was higher than BoU’s 5 per cent target and this justifies the central bank’s fears.
Responding to Dr Kasekende’s statement, the Uganda Bureau of Statistics director in- charge of macroeconomic statistics, Mr Chris Mukiza, said the statistics body has no mandate to speculate as its figures are evidence based.
He, however, said in case of a slight rise in core inflation, Ugandans might experience a slight increase in cost of services and living, with the exception of food prices.
The Central Bank Rate for March was maintained at 12 per cent for the fourth consecutive month to mitigate risks of a rise in the cost of living and help the economy continue on the recovery path.
Headline inflation decelerated from the high of 30.4 per cent in October 2011 to 3.4 per cent in February this year, while core inflation eased from 30.8 per cent to 5.5 per cent over the same period.
Industry experts attributed the fall in inflation to increased food production and constrained aggregate demand that followed a hike in commercial bank lending rates for shilling denominated loans which made it hard for the private sector to access cheap credit.
Dr Kasekende said resorting to foreign exchange denominated loans is dangerous to businesses whose income stream is in Shillings because they might face a problem when the exchange market is faced with volatilities.
Despite the Central Bank Rate falling by 11 percentage points to 12 per cent, most commercial banks prime lending rates average at over 20 per cent for Shilling denominated loans.
With core inflation at 5 per cent, it means that the real interest rates are about 17 per cent, which Dr Kasekende said is very high for businesses and the economy.
