Which way for interest rates?

An interest rate is a fee that you are charged for borrowing money from a bank, expressed as a percentage of the total amount of the loan one has borrowed.

In other words, interest is basically the cost of money. You are paying for the ability to use money you have not yet accumulated.

So interest is an incentive for the bank to lend you money and a premium for the risk they take in lending to you.
Theoretically and practically, charging interest is one of the ways lenders make their profit.
So if you borrow money, either for a business expansion, home development, buying a car or any other thing you would like to do with the borrowed money, you pay interest on it.

While anyone can lend money and charge an interest rate, it is usually banks that are involved in the business of lending out money to the general public. Banks use the money deposited on savings accounts to lend to borrowers, who in turn pay interest on their loans.

In the credit market locally or internationally, interest may rise or fall depending on prevailing economic conditions. Low interest rates benefit the real economy by providing companies with easier access to loans to expand their businesses.
When interest rates are low, consumers tend to borrow more money, and they put that money back into the economy by spending more on products and services.

Lowered interest rates mean the cost of paying back a loan is less than what it used to be. The savings people gain create more disposable income.

While higher interest rates tend to moderate economic growth, they increase the cost of borrowing, reduce disposable income and limit consumer spending.

Higher interest rates tend to reduce the rate of economic growth and inflationary pressures.
Uganda has been registering a decline in interest rates in the past six months. Following the monetary policy stance, there is a likelihood that interest rates in the country will edge up due to fiscal operations by government.
Despite the Bank of Uganda holding the policy rate, Central Bank Rate (CBR) at 9.0 per cent, the outlook in Uganda’s credit market points to a rise in interest rates.

While presenting the monetary policy statement two weeks ago for this month, the governor Bank of Uganda, Mr Emmanuel Tumusiime Mutebile, said: “The band on the CBR will be maintained at +/-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 have been set at 13.0 per cent and 14 per cent respectively.”

Projections
The chief executive officer of Stanbic Bank Uganda, Mr Patrick Mweheire, said interest rates are expected to trend northwards in the second half of this year following macro developments and government policy.
“Rates are rising mainly driven by government of Uganda’s domestic financing requirements – 2018/19 projected at Shs1.78 trillion coming from under Shs500 billion net growth for calendar year 2017. Higher rates are expected to boost sector income in the second half of 2018,” he said.

Due to the fiscal deficit Uganda government year in year out do borrow externally and domestically to finance its fiscal deficit issuing government securities treasury bills and bonds bearing both short term and long maturity periods (tenors).
Increased or high domestic borrowing from the domestic market by the government in one way encourages interest rates to stay high or rise based on market conditions at a given time.

The managing director of Centenary bank, Mr Fabian Kasi, told Daily Monitor: “If government decides to borrow from the domestic market, there is a tendency for increased demand for credit prices (that is the increase in interest rate).”
Regarding the level of interest rates at Centenary bank, Mr Kasi said their prime lending rate has not changed from 21 per cent while the commercial lending rate is 21 plus 2 depending on the risk profile of the borrower.
Mr Kasi is not sure by what magnitude the lending rates will rise.

In its monetary report highlight of August 2018, BoU said interbank money market rates edged up on account of tight liquidity conditions driven by end-year corporation tax remittances.

However, the central bank said the Weighted Average Lending Rate continued to ease in June 2018, declining to 17.7 per cent for Shilling denominated loans and marginally rising to 8.4 per cent for forex denominated loans.
The central bank said a sectoral decomposition shows that the fall in rates for Shilling denominated loans was mainly on account of lower rates to the manufacturing (15.4 per cent) and trade (15.1 per cent) sectors, which had a combined share of 53.4 per cent of new loans in June.

Outlook
However, giving insights on the interest rate outlook, the executive director of research BoU, Dr Adam Mugume, said interest rates are likely to rise on account of fiscal policy expansion with government’s planned borrowing of Shs1.8 trillion from the domestic market.

The Ministry of Finance in its economic performance report for July 2018 said commercial bank lending rates reduced from 20.20 per cent in May to 17.68 per cent in June 2018.
“This reduction is partly explained by the lagged effect of monetary policy easing by BoU in the preceding months,” Ministry of Finance said.

On yields on Treasury Bills, the ministry explained that yields edged upwards across all tenors revealing that the average weighted yields to maturity for July 2018 were 10.5 per cent, 12.0 per cent and 14.5 per cent for the 91, 182 and 364-day tenors, respectively.
“This compares with 9.8 per cent, 11.0 per cent and 12.6 per cent in June 2018. The stock of outstanding private sector credit increased by 2.8 per cent from Shs1.2 trillion in May 2018 to Shs1.3 trillion in June 2018,” the economic performance report of July by the Ministry of Finance reveals.