Covid-19 force BoU to cut CBR to lowest level ever
The Central Bank Rate, which plays a big role in determining commercial bank interest rates, has been cut to the lowest level (6.5 per cent) since it was introduced in 2011. PHOTO/FILE/NMG
What you need to know:
- According to Mr Mutebile, a renewed lockdown to combat the spread of and lower than anticipated domestic demand, are expected to exert downward pressure on domestic inflation even as the balance of risks remains stable.
Risks to economic growth, among them uneven recovery of the economy and weak level of business investment has forced Bank of Uganda to reduce the Central Bank Rate (CBR) to the lowest level ever.
The challenges, much of which are due to Covid-19, have presented growth challenges forcing the Central Bank to reduce the CBR to 6.5 per cent from 7 per cent.
This is the lowest level the Central Bank Rate has been reduced since it was first introduced in 2011. The rate then stood at 7 per cent before it was increased due to rising inflationary pressures, especially in election periods.
The reduction of the CBR, according to Bank of Uganda, will, among others seek to support economic growth, which continues to be weakened by Covid-19.
In a statement yesterday, Bank of Uganda Governor Emmanuel Tumusiime Mutebile, said the Monetary Policy Committee had assessed that risks to economic outlook are still on the downside, characterized by sectoral unevenness of economic recovery and a weak level of business investment.
Therefore, he said, economic recovery still requires monetary policy support until when the slack is absorbed so that the 5 per cent inflation target is sustainably achieved.
Mr Mutebile also noted that indicators show that the momentum of economic activity for the quarter to May 2021 had been moderate, supported by growth of 3.3 per cent during the 2020/21 financial year, which is slightly higher than the initial projection of 3.1 per cent.
However, he said, a contraction in private sector investment has persisted, partly reflected in heightened Covid-19 induced uncertainties that are expected to be relaxed by the effectiveness of vaccines and their availability.
Available data indicates that less than a million Ugandans have been vaccinated, which is far too low to curtail the spread of the virus that has since May surged to new highs.
However, Mr Mutebile noted that: “the vaccination process is expected to gather steam in the coming months, which should help to normalise economic activity”.
Currently, he said, the resurgence of Cocid-19 infections and conceivably more contagious variants remains one of the main risk to the economy and is expected to dampen domestic demand in all sector of the economy in the near-term or in the coming 12 months.
Mr Mutebile also noted there was little space for stimulus packages to respond to the fragile economic growth, noting that the raising public debt had necessitated fiscal consolidation to keep debt down.
The Monetary Policy Statement indicated that private sector growth slackened in between March and April and continues to be threatened by an increase in non-performing loans.
However, Mr Mutebile said, inflation remains subdued, averaging at 2.7 per cent and 3.4 per cent, respectively in the 12 months to March 2021.
Further threat
According to Mr Mutebile, a renewed lockdown to combat the spread of and lower than anticipated domestic demand, are expected to exert downward pressure on domestic inflation even as the balance of risks remains stable.
