BoU warns of rise in inflation

With the economy now partially reopened, there is a likelihood of a surge in demand for imports, which might impact local inflationary pressures.  PHOTO | MICHAEL KAKUMIRIZI

What you need to know:

  • IMF warning. However, according to Prof Gita Gopinath, the International Monetary Fund economic counsellor and director of research, Bank of Uganda should avoid prematurely tightening policies when faced with transitory inflation pressures but should instead prepare to move quickly if inflation expectations show signs of de-anchoring. 
  • “Emerging markets should prepare for possibly tighter external financial conditions by lengthening debt maturities where possible and limiting the buildup of unhedged foreign debt,” he said. 

Bank of Uganda has warned that the threat of imported inflation is expected to force the Central Bank to tighten financial markets as it seeks to protect the already weak economy battered by Covid-19-related disruptions.  

In highlights contained in the Bank of Uganda Monetary Policy statement, the Central Bank said the rebound in the global economy is expected to open up the import market that has been starved by months of lockdowns yet it will subdue demand for exports thus opening up the economy to imported inflation. 

Mr Emmanuel Tumusiime Mutebile,  the Bank of Uganda governor, said lobal commodities such as oil and other input prices have been surging since May 2020, which could influence an increase in domestic prices, especially now that the economy has partially been reopened.

“Inflation will rise gradually through the year due to the temporary effects of [Covid-19] containment measures,” he said, but noted it is likely to remain below the 5 per cent Central Bank target. 

The Central Bank has also projected depreciation of the shilling, resulting from tightening of monetary policy by advanced economies, which is expected to have spillover effects in the local currency markets. 

However, even with the challenges, the Central Bank indicated at the weekend that it had maintained the Central Bank Rate (CBR) at 6.5 per cent, noting that there was need to mitigate risks that are likely to impeded recovery of the economy. 

Bank of Uganda uses the CBR to mitigate a number of economic threats, among which include inflation. 

Currently, according to Uganda Bureau of Statistics, inflation is still below the Central Bank’s target, averaging at 2.4 per cent and 3.4 per cent for headline and core, respectively. 

Mr Mutebile also said that economic growth is expected to slowdown in the quarter to September due to Covid-19 disruptions, noting that indicators had shown subdued activity with economic growth projected to remain in the range of 3.5 per cent to 4 per cent during the 2021/22 financial year. 

The Central Bank also indicated that a number of sectors, among them tourism are unlikely to return to normal any soon, but noted that “if vaccination picks up in the later part of the year and movement restrictions eased, it will allow gradual economic recovery. 

Mr Mutebile also indicated that economic growth is expected to return to pre-Covid-19 growth levels of between 6 and 7 per cent in about three years, sustained by accelerated private consumption due to pent up demand and strong growth in the external market, which should contribute to a solid pick up in exports. 

This, he said, will be supported by a gradual return in tourism receipts and accelerated push to achieve targets in the gas and oil sector envisaged under the Final Investment Decision pronouncements.