The Central Bank has kept its key lending rate at 11.5 per cent for the second consecutive time, saying the country needs a flexible environment to support low lending rates.
Uganda’s economy is experiencing positive and negative conditions emanating from both domestic and external pressure, which the Bank of Uganda says needs a balanced policy stance to ensure stability in the economy.
The decision to retain the Central Bank Rate - the rate at which commercial banks borrow money from the Central Bank - is aimed at consolidating the gains made to stabilise the Uganda Shilling which has been sliding on the back of donor aid cuts.
The move also shrinks the likelihood of a reduction in the cost of loans, since commercial banks use the CBR to set interest rates.
Addressing a news conference to announce the monetary position for the month of March yesterday, Bank of Uganda governor Emmanuel Tumusimme- Mutebile said: “Given the current projections of annual core inflation, and real GDP [Gross Domestic Product] growth, Bank of Uganda believes that a neutral monetary policy stance is warranted in the March 2014.”
Mr Mutebile explained that the Bank of Uganda annual core inflation forecast in the short run will be in the range of 4-5 per cent in the few months before increasing to between 5.5 per cent and 6.5 per cent over the 12 months.
However, he said there are risks of stronger inflation from possible further exchange depreciation, stronger domestic demand, especially from the fiscal sector and increase in food prices on account of the current drought and regional food supply shortfall.
“The magnitude and timing of possible declines in foreign aid are also a source of uncertainty for the balance of payment and the economy,” he said.
Hinting on real GDP growth, Mr Mutebile said the real GDP growth 2013/14 is projected to be relatively buoyant, supported by fiscal stimuli, strengthening global environment, strong inflows of foreign direct investment and house consumption.
Uganda’s GDP growth rate is expected to grow by 6.2 per cent in this financial year 2013/14.
“However, there are risks to this growth outlook emanating from weak bank credit growth.”
On the question of the anticipated aid by the donor community over the anti-gay Bill, Mr Mutebile ruled out that it will have no impact on foreign exchange market, because Bank of Uganda has adequate foreign exchange reserve of $3.2 billion, which it can use for intervention in the foreign exchange market to stabilize the exchange rate.
The director research at Bank of Uganda, Dr Jacob Opolot, explained that while other rates have declined in line with the monetary policy stance, weighted average lending rates have stabilised at about 22 per cent since September 2013.
“The relatively high lending rates could therefore be explained by structural factors such as the high cost of doing business, heightened risks aversion and difficulties in assessing credit worthiness of borrowers,” he said.
The managing director of Alpha Capital, Mr Stephen Kaboyo, told Daily Monitor that under the current circumstances, the only strong reason BoU would have to change the policy rate would be to bolster the Shilling given that higher interest rates tend to push the value of the currency by offering a greater return on investment.
Growth in bank credit to the private sector has continued to be low at 6 per cent; Addressing this question of continued low bank credit to the private sector Mutebile said there is need for further reduction in the interest rate by the commercial banks.