Today, the first Monetary Policy Committee (MPC) meeting of 2017 will take place at Bank of Uganda (BoU) to set the Central Bank Rate (CBR) for February 2017.
Ahead of the meeting, the committee has been easing the key rate since April 2016 from a high of 17 per cent to the current 12 per cent.
Prior to the last meeting in December 2016, the projection was that there would be a slowdown in easing the rate further.
However, the decision was taken to ease the rate in order to boost growth. Experts are now warning that any decision now should be taken in hindsight that there is a limit on how far below the CBR can go.
“Our view is that as credit growth picks up momentum like we have seen at the end of the year, we expect a neutral stance but of course there is a bias towards a cut. So if we are surprised, then we’re wrong if there is cut at the next meeting. We still think that that will be the final point to be the bottom of policy rate cuts from BoU this year,” said Mr Jibran Quiresishi, the chief economist, East Africa at the Standard Bank Group during the Stanbic Uganda Economic Outlook on Monday.
The argument is also premised on the fact that they expect BoU to allow the rate cuts from 2016 to first take real effect on lending rates.
In 2016, despite the reduction in the CBR, commercial bank lending rates remained sticky downwards and slowed credit to the private sector.
“In 2016, we saw a number of things in our economy that have not happened in a long time. We are really concerned about how we get our growth back up to high single digits. One of the more hairy statistic for me being in the banking sector was the fact that credit growth in 2016 was lower than GDP growth. We have not seen that in a long time. Credit growth in the market was less than 3 per cent and yet GDP was around 5 per cent,” said Mr Patrick Mweheire, the CEO, Stanbic Bank Uganda.
The banking sector in 2016 also experienced some of the highest levels of non-performing loans (NPLs) that peaked at about Shs900 billion.
The same NPLs also claimed one bank, Crane Bank, that found itself undercapitalised.
Mr Mweheire said the figure of NPLs have dropped but the levels are still high, explaining why lending rates remain sticky downwards.
According to Mr Stephen Kaboyo, the managing partner at Alpha Capital Partners, the MPC meeting has to consider at least four factors in making the decision.
These include slowing economic growth, inflation on the uptrend, the prolonged drought that has hit the country, underlying depreciation pressure on the Shilling and global economic dynamics.
“In my view striking the right balance between growth and price stability at this time may necessitate BoU to leave the policy rate unchanged. This move would foster growth at the point where weakness in the economy is widespread while the increased spending on infrastructure expected to lift productivity will take time to be felt,” he points out in an email.
If there was going to be a more clear view on the thinking at BoU, it came from Dr Adam Mugume, the executive director of research at BoU during the Stanbic Uganda Economic Outlook Forum.
“Overall we believe that there is a lot of uncertainty, going cautiously I think would be the ideal but is only on the technical side,” he said.
In the medium term, he said the CBR can even fall in the 9 per cent range but that is when the economy is growing at a much faster rate of about 6 per cent and inflation is within the BoU target of 5 per cent.