BoU maintains 7% rate, warns of high inflation

The Bank of Uganda yesterday maintained the Central Bank Rate (CBR) at 7 per cent but warned that inflation could rise further and peak at 6.1 per cent in the first quarter of 2021.

High inflation erodes the purchasing power of currency due to a rise in prices in goods and services in the economy requiring people to have more money to purchase goods/services. It also raises the cost of borrowing money from the banks by companies and individuals. Presenting the monterey policy statement for August, Bank of Uganda governor Emmanuel Tumusiime Mutebile said the Monetary Policy Committee (MPC) is cognisant that its primary mandate is to achieve the medium-term target of (Consumer Price Index (CPI) inflation of 5 per cent.

Mr Mutebile said the MPC noted that the extreme uncertainty characterises the outlook, which is heavily contingent upon the intensity, spread and duration of the Covid-19 pandemic, particularly the heightened risks associated with a second wave of infections, adding that in these conditions, supporting the recovery of the economy is overriding in the conduct of monetary policy provided inflation remains in the range of 5 per cent +/-3 percentage points.

He further explained that the path for Consumer Price Index (CPI) inflation over the next 12 months largely reflects the influence of containment measures particularly on public transport and increases in prices of imported consumer goods as a result of higher taxes to support import substitution.

However, he said the decline in food crop and energy prices and subdued demand could partly hold inflation down.
“Core inflation is expected to peak at 6.1 per cent in the first quarter of 2021, while headline inflation could peak at 6.2 per cent. In the medium term, the inflation outlook depends primarily on the speed and strength at which demand and supply recover,” he said.

Mr Mutebile said risks to the inflation outlook include a higher fiscal deficit and a more depreciated exchange rate due to the weakening external position.

“On the downside, domestic demand may take longer to recover despite the gradual easing of the lockdown. Moreover, food crop prices and external sources of inflation are likely to remain weak in the near-term amid the global economic downturn. The balance of risks to the inflation forecast are assessed to be on the upside with core inflation expected to rise above the 5 per cent target within 12 months, even though GDP growth is expected to remain below its potential levels. BoU has, therefore, decided to maintain the CBR at 7 per cent,” he said.

Economic growth
Mr Mutebile added the Covid-19 pandemic has affected both the demand and supply side of the economy. He explained that as the easing of the lockdown continues, the economy is expected to slowly recover, reflecting the effects of a slow rebound in both foreign and domestic demand and, subdued confidence on the part of households and firms.

He said in Uganda, economic activity is estimated to have contracted by 3.2 per cent in the second quarter of 2020 as a result of a combination of Covid-19 containment measures and floods.

However, he did express optimism that the complementary fiscal and monetary policy actions have provided a foundation for the recovery of economic activity as the lockdown is relaxed.

On the upside (positive), Mr Mutebile said economic growth could turn out stronger than projected if the spread of the virus is contained or if a vaccine is availed earlier than it is being assumed.

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