Inflation rise unlikely to affect CBR - experts
Posted Wednesday, October 2 2013 at 01:00
Raising the CBR will worsen the already fragile nature of growth and sluggish output.
Commercial banks may have another chance to borrow from the Central Bank at the current lending rate if analysts’ expectations to leave the benchmark lending rate unchanged come to pass today.
Bank of Uganda is expected to announce the October Central Bank Rate (CBR) – the rate at which BoU lends to commercial banks for onward lending to their clients, and analysts expect the rate to remain unchanged at 12 per cent due to the prevailing market conditions.
Mr Stephen Kaboyo, Alpha Capital Partners managing director told Daily Monitor yesterday that although the 0.7 percentage point September inflation increase is big enough to trigger a CBR increase, raising the CBR will worsen the already fragile nature of growth and the related sluggish output.
“I expect BoU to exercise a lot of caution in setting policy as regards the CBR. It will have to balance a number of factors including nurturing growth, low levels of lending and investment weighed down by sluggish output, against elevated risks on the inflation front,” Mr Kaboyo said.
The Uganda Bureau of Statistics Consumer Price Index (CPI) figures show that headline inflation rose by 0.7 percentage points from 7.3 per cent in August to 8 per cent in September as a result of increases in prices of food, beverages and tobacco. The increase in prices for food was attributed to low supplies to markets while tobacco and beverages was due to tax increases that were adjusted in the 2013/14 financial year.
African Alliance Uganda chief executive officer Kenneth Kitariko said leaving the CBR at the current rate will be the best decision for BoU since the rise in inflation is mainly driven by a rise in food prices. “There are shortfalls in food supplies but with the onset of rains, increased supplies are expected, a situation that is expected to calm inflationary pressures,” Mr Kitariko said.
Tightening the monetary policy stance is one of the tools BoU uses to control inflation by reducing growth in bank credit and slowing down demand for goods and services. The measure worked well to bring down inflation from 30.4 per cent in October 2011 to 3.4 per cent in April this year before peaking up again.
BoU also increased the CBR in September to 12 per cent from 11 per cent in August, following a 2.2 percentage point increase in inflation from 5.1 per cent in July to 7.3 per cent in August this year. Despite inflation posing the biggest risk to future course of the monetary policy; Mr Kaboyo said tightening the CBR further may not be the best tool at the moment considering the prevailing domestic conditions.
The economy is yet to fully recover from the lag effects of the 2011 economic challenges that saw commercial banks’ lending rates rise to close to 30 per cent, constraining access to credit and contracting overall economic growth. Commercial bank lending rates are still high, averaging at about 21 per cent.