Economists welcome BoU decision to hold policy rate

BoU Governor Emmanuel Tumusiime Mutebile

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Result. The move is expected to maintain stability in the foreign exchange market.

Kampala. Economists have welcomed Bank of Uganda (BoU)’s decision to hold the Central Bank Rate (CBR) at 10 per cent saying it supports economic activities while controlling inflation.
The economists are also optimistic that the move will help in maintaining stability in Uganda’s foreign exchange market which is suffering from shilling depreciation against the US dollar.


The Central Bank’s most influential tool is the ability to increase or decrease the discount rate using CBR done by either tightening and or easing monetary policy.
The shifts in this crucial interest rate have a drastic effect on consumer spending and borrowing.
Ms Rachael K. Sebudde, the senior economist at the World Bank Uganda country office, told Daily Monitor last week that further reduction in the CBR could have a negative impact.


“Given that they have reducing the policy rate since April last year, another big reduction this time again would lead to destabilisation in the economy. It can lead to a rise in inflation and it would also have a negative impact on the exchange rate,” she said.
In the new monetary policy, the central bank has forecast GDP growth rate between 5 to 5.5 per cent for this financial year.
A development economist and lecturer at Makerere University’s School of Economics, Dr Fred Muhumuza in an interview with Daily Monitor, said it is not yet time for the central bank to reduce the CBR.


He believes it is better to wait and see the impact of the current monetary policy and what is happening in the economy since rates have been coming down for the last one year.


“For instance, in the UK the central bank policy change is three months; in Uganda, BoU used to have its policy announcement/change in one month but they have now changed to two months to gather enough data,” he said.
Hinting on the projected economic GDP growth, Dr Muhumza said it is too ambitious because the risks that affected the economy in the last financial year are still on.


“Risks like bad weather, slower growth in agriculture, the war in South Sudan, high level of non-performing loans in banks, low FDI inflows exchange rate depreciation are still there, a 4.5 per cent growth would have been more realistic,” he said.
Presenting the monetary policy statement for the month of August 2017, BoU governor Emmanuel Tumusiime Mutebile said medium-term inflation forecasts remain largely unchanged from those of the June 2017 Monetary Policy Committee.


Mr Mutebile projected that both the annual headline and core inflation are forecast to remain in the 5+2 percentage range which is consistent with the BoU’s medium-term target of 5 per cent for core inflation.


He said: “Given the fact that inflation is expected to remain around the medium –term target and that economic activity is picking –up, with output approaching potential, a neutral monetary policy stance is warranted. The BoU will, therefore, leave the CBR unchanged at 10 per cent.”


He added: “The band on the CBR will be maintained at plus/minus 3 percentage points and the margin on the rediscount rate at 4 percentage points on the CBR. Consequently, the rediscount rate and the bank rate will remain at 14 per cent and 15 per cent, respectively.”