Kampala- The governor of Bank of Uganda, Mr Emmanuel Tumusiime-Mutebile, has said the Central Bank’s policy of maintaining low inflation will help the country achieve sustainable economic growth, job creation and structural transformation.
Addressing MPs during a sensitisation workshop on Friday under the theme: “Role of the Bank of Uganda in ensuring macroeconomic stability,” Mr Mutebile said since the 1990s, BoU has agreed with the government to pursue a 5 per cent target or less for annual core inflation.
He said the target has been stated publicly in many official documents such as the current National Development Plan and budget speeches.
“We aim to achieve this target of 5 per cent for core inflation on average over the medium term, rather than in every single month. It is not possible to hold core inflation constant at 5 per cent, month after month, because core inflation is unavoidably subject to shocks, such as those from the exchange rate or food prices, which sometimes push it above 5 per cent and sometimes push it below,” he said.
In its pursuit of controlling core inflation, the Central Bank takes a forward looking approach because monetary policy operates with significant lags.
“A change in the interest rate today will not have its full impact on prices for at least one year ahead. Therefore, in setting the policy interest rate, the BoU makes a forecast of inflation, 12 months ahead,” he said.
Mr Mutebile also said high inflation also deters domestic savings and encourages capital flight.
He said unless private investors can be confident that inflation will be kept under control, it will be difficult to mobilise private investment on the scale necessary to generate sustainable economic growth, job creation and structural transformation.
He said in the long run, inflation always reflects an imbalance between what economists call aggregate demand and aggregate supply in the economy.
“By aggregate demand, we mean overall demand from all sources, for goods and services. If the overall demand for goods and services in the economy exceeds the capacity of the economy to meet this demand through a combination of domestic production or imports, prices must inevitably rise,” he said.
Mr Mutebile added: “Monetary policy affects aggregate demand in the economy, mainly by influencing the level of spending by the private sector, which accounts for about 85 per cent of total spending in the economy. Inflation can be controlled by the judicious implementation of monetary policy.”
The Speaker of Parliament, Ms Rebecca Kadaga, said the House started working with the Central Bank in 1966 and pledged that it will continue passing legislations and appropriation of financial resources in various sectors of the economy as planned.
However, she said: “The 10th Parliament has come at a time when interest rates are high and businesses are collapsing, we have time to discuss this further.”
Mr Amos Lugoloobi, the chairperson of the Budget Committee of Parliament, said the primary objectives of monetary policy are to maintain price and financial stability and help achieve full employment.
“At times there may appear to be a conflict between the goals of inflation and economic growth. But we have learned from hard experience that high inflation distorts the private sector’s savings and investment decisions, leading to slower growth,” he said.
Mr Lugoloobi added: “That is why countries have increasingly placed great emphasis on price stability and many of them have made low and stable inflation the primary objective for monetary policy.”
However, Ms Syda Bbumba, the chairperson standing committee in National Economy of parliament, said: “The Bank of Uganda needs to do more in ensuring that the high lending rate reduces.”