Low inflation good for the economy
What you need to know:
The issue: Low inflation
Our view: We are hoping that the lower inflation rate will translate into lower interest rates and reduced cost of borrowing from commercial banks. This is what will allow local businesses to invest more resources thus, improving productivity.
Competition among telecommunication companies and the ongoing food crops harvest, among others, have led to a decline in Uganda’s inflation to 2.6 per cent – the lowest in the last seven months.
During the period under review, Uganda Bureau of Statistics (Ubos) data reveals that the telecommunication companies lowered the tariff for calls, especially Airtel, which lowered call rate across networks while MTN reduced the cost of its bundles reduced.
For example, a bundle of Shs35,000, which used to last for 1,200 minutes now lasts for 2,400 minutes for the same amount of money.
According to Ubos, annual headline inflation for the year ending July 2019 dropped to 2.2 per cent from 3.4 per cent registered in the year ended June 2019.
Pulled down by lower food prices due to the ongoing harvest season in the country, a lower inflation rate means Ugandans are spending less on food and such other items.
The key driver for the decrease in annual core inflation was annual services inflation that declined to 2.1 per cent for the year ending July 2019 compared to 4.7 per cent recorded for the year ended June 2019.
This is a step in the right direction as it reflects marginal growth and some level of recovery. Data from Ubos indicate that the economy grew by 6.1 per cent in the fiscal year 2018/19. On June 18, Bank of Uganda (BoU) left its policy rate at 10 per cent saying it was still effective enough to control inflation, stabilise the foreign exchange market and support economic growth.
When inflation is low, consumers and businesses can make long-term plans. Why? It is because the purchasing power of their money will have good value and won’t be susceptible to erosion.
We are hoping that the lower inflation rate will translate into lower interest rates and reduced cost of borrowing from commercial banks. This is what will allow local businesses to invest more resources thus, improving productivity. This in turn also makes them remain competitive without increasing their prices.
A lower inflation rate also indicates that prices are under control.
