Prepare for higher interest rates, says BoU  

Bank of Uganda has maintained a tight monetary policy, which has seen a rise in interest rates. Photo / File 

What you need to know:

  • Different data lines from Bank of Uganda indicate a further increase in interest rates in the coming months

Bank of Uganda's June Monetary Policy Report shows money market rates continued to steadily increase due to tight financial conditions, signaling an increase in interest rates.  

Data from Bank of Uganda indicates that overnight interest rates rose to 11.8 percent in May compared to 10.4 percent in February, while seven-day interbank average rates rose to 12 percent from 10.8 percent in the period.  

Similarly, the uptake of security lending rose to Shs26.2 trillion in May from Shs19 trillion in February, while yields in the primary and secondary markets in government securities edged up across all tenors due to increased supply of treasury securities, forcing interest rates to rise to an average of 20.8 percent in April compared to 20.6 percent in January.

The rates are expected to increase further due to heightened pressures in the money markets, in which average shillings lending rates rose to 17.7 percent from 16.9 percent in January, while foreign currency-denominated loans rose to 9.1 percent from 8.8 percent in the period.

The increases were more pronounced in agriculture, manufacturing, trade, and housing, while personal loans, transport, and communications registered moderate decreases. 

Overall, lending rates are expected to remain elevated owing to tightening of financial conditions, coupled with anticipated crowd-out effects from government borrowing locally. 

This has caused credit to the private sector to remain subdued, in which, according to the Monetary Policy Report, annualised average private sector credit growth fell to 7.8 percent in April 2024 from 8.4 percent in January. 

The report indicates that growth in shilling-denominated loans remained weak at 9.4 percent, while foreign currency-denominated loans moderated to 3.8 percent from 6.4 percent over the same period. 

Both gross credit extensions and recoveries declined in April, but the decline in extensions was faster than in recoveries, as banks increasingly cut back on renewing credit lines. 

Details indicate that demand and supply of credit remained on a downward trajectory with respective declines of Shs5.1 trillion and Shs3.4 trillion in April from Shs5.3 trillion and Shs3.4 trillion, respectively in January. 

However, despite heightened money market conditions, the private sector has largely remained expansionary, due to an increase in business activities, largely supported by an increase in output and new orders. 

Details contained in the Stanbic Bank Purchasing Managers’ Index indicate that during June companies reported an increase in input buying, in addition to taking on additional staff to reduce backlogs. 

The Index notes that job creation and purchasing activity were in part due to optimism despite higher utility, rent, material, and staff costs, which pushed input prices up again. The improved activity, therefore, saw the Purchasing Managers’ Index register a positive return of 51.9 in June, which is above the 50 threshold. 

Details indicate that there was continued expansions in output and new orders, with sequences for both extended to three months.  The index also notes that of the five monitored sectors, wholesale & retail, industry, and construction registered greater activity and new orders, thus encouraging firms to hire additional staff on permanent and temporary terms. 

Mr Christopher Legilisho, a Stanbic Bank economist, said June had produced a third successive month of strong private sector activity growth, in which output and new orders increased from healthy consumer demand, referrals, and newly acquired clients. 

“Firms increased staffing levels for a 15th month now, including both part-time and full-time workers due to strong output,” he said.