Weakening shilling could push inflation above 5% target by July, says Bank of Uganda
Bank of Uganda says the shilling has faced serious volatility against the dollar since November, thus driving up inflationary pressures. Photo / File
What you need to know:
- The shilling has been depreciating since November last year, experiencing a sharp decline in February, which yesterday prompted Bank of Uganda to increase the Central Bank Rate to 10 percent
A sudden depreciation of the shilling against the dollar has presented heightened inflationary pressures, which Bank of Uganda yesterday said might see inflation rise above the 5 percent target in the second half of 2024.
The shilling has been depreciating since November last year, experiencing a sharp decline in February, which yesterday prompted Bank of Uganda to increase the Central Bank Rate to 10 percent from 9.5 percent.
Speaking during release of the Monetary Policy Statement in Kampala yesterday, Bank of Uganda deputy governor Michael Atingi-Ego, said the sharp depreciation of the shilling, if it continues, was likely to push up inflation above target and above 5 percent in the quarter in 2025.
“Inflation is projected to rise above the medium-term target of 5 percent by quarter one of 2024/25 financial year and stay above 5 percent throughout 2025 unless monetary policy is tightened,” he said, noting that whereas there are downward inflationary pressures arising from vanishing effects of supply-side shocks, receding global inflation, and improved domestic food supply, these where likely to be outweighed by the effects of a weaker shilling. The shilling has experienced heightened volatility, opening yesterday at Shs3,909.96 against the dollar before closing at Shs3,910, due in part, to an increase in outflow of some offshore investors and domestic market demand.
Thus, Bank of Uganda said the risk of inflation remained elevated, thus requiring a tight monetary stance, to contain inflation, which has already risen to 3.4 percent.
However, Dr Atingi-Ego said, despite the existing threats, economic growth for the 2023/24 financial year would remain unchanged at 6 percent but is projected to drop to between 5.5 percent and 6.5 percent in the outer years compared to earlier projections of between 6.5 percent and 7 percent.
The downward revision, he said was reflective of the likely impact of tighter monetary policy, adding that a rise in inflation could as well depress household real incomes, reducing consumer spending, while investment expenditure could be dampened.
Bank of Uganda also expects tax revenues to underperform, which could increase domestic financing that as a result might crowd out private sector credit growth and dampen economic activity.
However, Dr Atingi-Ego noted strengthening activity in the oil sector and the Financial Action Task Force’s removal of Uganda from the grey list at the close of last month could unlock additional foreign direct investment inflows and somewhat mitigate the negative effects.
