BoU raises Central Bank rate further to 10.25 %
Economic growth for FY 2023/2024 is forecast at approximately 6 percent, and subsequent years are expected to hover between 5.5 percent and 6.5 percent.
What you need to know:
- The Deputy Governor warned that a further rise in inflation may dampen household real incomes, leading to reduced consumer spending, while high raw material import costs could constraint investment expenditure.
The Bank of Uganda (BoU) yesterday moved to raise its Central Bank Policy Rate to 10.25 percent to control an expected rise in inflation and interest rates as well as maintain stability in the foreign exchange market.
The central bank policy rate (CBR) is the rate that is used by the central bank to implement or signal monetary policy stance depending on the prevailing economic environment.
The implication of the current tight monetary policy may result in high lending rating in commercial banks, which currently stands at 18.1 percent and may also lead to slower economic growth.
The BoU said considering the persistent upside risk to inflation, its Monetary Policy Committee (MPC) deemed it necessary to tighten monetary policy further to anchor inflation around the medium-term target of 5 percent.
The deputy governor Bank of Uganda, Dr Michael Atingi-Ego, while presenting the monetary policy statement for April 2024, said the stance balances the need to contain inflation while supporting sustainable economic growth.
He said the standpoint is essential for Uganda’s social-economic transformation.
“The MPC stands prepared to respond to any materialization of the identified risks,” Dr Atingi-Ego said..
The Uganda Bureau of Statistics said on March 28 that Uganda’s annual headline inflation slightly decreased to 3.3 percent from 3.4 but on the other hand, it said the annual core inflation stayed at the same rate of 3.4 percent due to increased charges in the financial and transport services.
Dr Atingi-Ego said the evolution of inflation remains challenging and influenced by factors such as the exchange rate of the shilling, supply side shocks, global inflation, and domestic food supply.
He said the forecasts have been adjusted downwards from the previous round, largely due to the relative stability of the Shilling exchange rate.
Despite the downward adjustments in inflation, Dr Atingi-Ego still expressed worries that short-term projections indicate inflation may rise to between 5.5 percent and 6 percent within 12 months and return to the medium-term target of the 5 percent anticipated in the second half of 2025.
“Significant upside risks to the inflation outlook persist, including geopolitical tensions in the Middle East, potential energy price hikes, and tighter global financial conditions that could lead to a stronger depreciation of the Shilling exchange rate, and unfavorable weather patterns,” Dr Atingi-Ego said.
“On the contrary, inflation may undershoot expectations if monetary policy reduces demand more than anticipated, and global growth deteriorates sharply, resulting in lower import prices,” he added.
Last month, the Bank of Uganda had a special Monetary Policy Committee sitting, which saw it raise the CBR to 10 percent, up from 9.5 percent.
Dr Atingi-Ego said this Central Bank Rate increase has had a spillover effect of stabilising the shilling exchange rate. He said the Uganda shilling at that time was trading at Shs3, 950 per US dollar but has now appreciated against the US dollar and is trading at Shs3,830/Shs3,840 per US dollar.
“However, the Shilling remains vulnerable due to outflows of short-term foreign investors’ funds from the domestic market in search of attractive yields in other markets and strong domestic demand by corporates. The weakening of the Shilling significantly impacts domestic prices, which could push inflation higher,” he said.
Speaking about the economy at large, Dr Atingi-Ego said while the economy retains resilience, recent high-frequency indicators suggest a slight downturn in near-term growth. He said uncertainty surrounding the global economic outlook, depreciation of the Shilling, and tight domestic financial conditions could dampen domestic demand.
“Nonetheless, economic growth for FY 2023/2024 is forecast at approximately 6 percent, and subsequent years are expected to hover between 5.5 percent and 6.5 percent,” he said.
This means economic growth below the earlier projection of 7 percent 2024/2025 due to external internal environment.
The Deputy Governor warned that a further rise in inflation may dampen household real incomes, leading to reduced consumer spending, while high raw material import costs could constraint investment expenditure. He said shortfalls in tax revenue relative to targets may necessitate tax hikes or increased domestic financing, which could potentially crowd-out private sector credit growth.
Dr Atingi-Ego also said external factors such as a weaker global economy or escalated geopolitical conflicts could further impede growth through disruptions to supply chains and reduce export demand.
The executive director of research at Bank of Uganda, Dr Adam Mugume, said the prevailing condition of reduced aggregate demand in the economy was a result of tight fiscal and monetary policy that have been put in place.
“In the past two quarters, there was a 7 percent contraction in government expenditure, government consumption expenditure contributes 23 percent growth to the GDP,” he said.
Dr Mugume said private credit, in the quarter that ended February 2024, stood at 7.7 percent, which indicates the credit to the private is still growing at a slow pace although there is liquidity in the financial system.
