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Let’s simplify monetary policy statements
Oscar Muwanga
What you need to know:
- The terms used in these monetary statements can often be confusing.”
Monetary policy is a powerful tool used by the Bank of Uganda to manage the economy. However, the terms used in these statements can often be confusing. Let’s break down some of these terms using simple language and relevant examples to show how they impact our lives daily. Inflation: It is the rate at which the general level of prices for goods and services rises.
When inflation is high, your money doesn’t go as far as it used to. Over a decade, prices can double, meaning that what you could buy for 10,000 shillings in 2013 might cost you 20,000 shillings in 2023. The Bank of Uganda aims to keep inflation low so that your money retains its value and you can plan for the future with more certainty. Interest rates: They are the cost of borrowing money or the reward for saving it. When the Bank of Uganda raises interest rates, it becomes more expensive to borrow money for things like buying a home or starting a business.
Conversely, higher interest rates mean you earn more from your savings. For instance, if you have a savings account with a bank, a higher interest rate will give you more money over time. Imagine you saved Shs1 million at a 5 percent interest rate; in a year, you would earn Shs50,000.
If the rate was 10 percent, you would earn Shs100,000. Monetary policy rate (MPR): It is the benchmark interest rate set by the Bank of Uganda. It influences other interest rates in the economy, such as those on loans and savings. If the Bank raises the MPR, commercial banks will likely raise their interest rates too. This can slow down borrowing and spending, which helps to control inflation. For example, if the MPR goes up, the interest rate on your car loan might also increase, making it more expensive to buy a car on credit.
Exchange rate: This is the value of the Ugandan shilling compared to other currencies, like the US dollar. A strong shilling means you can buy more with your money when you travel or import goods. However, it also means that Ugandan goods are more expensive for foreign buyers, which can hurt exports. For example, if the shilling strengthens against the dollar, it might be cheaper for you to buy a smartphone from abroad, but Ugandan coffee might become more expensive for buyers in Europe.
Gross Domestic Product (GDP): It is the total value of all goods and services produced in Uganda over a specific period.
It’s a measure of the country’s economic health. When GDP is growing, it usually means more jobs and higher incomes. If a local farmer produces more crops this year than last year, that increase contributes to the GDP. Higher GDP growth often leads to better living standards for everyone. Fiscal policy: While not directly part of monetary policy, fiscal policy works alongside it.
Fiscal policy involves government spending and taxation. For example, if the government spends more on building roads and schools, it can create jobs and stimulate the economy. On the other hand, if taxes are high, people have less money to spend, which can slow down economic growth. Balance of payments: This records all economic transactions between Uganda and the rest of the world. It includes exports and imports of goods and services, as well as financial transfers.
A positive balance means Uganda exports more than it imports, which is generally good for the economy. For instance, if Uganda exports a lot of coffee and imports fewer cars, the balance of payments would be positive.
In conclusion, inflation, interest rates, the MPR, exchange rates, GDP, fiscal policy, and the balance of payments are all interconnected. They shape the economic environment in which we live, work, and plan for the future. By keeping an eye on these indicators, we can better understand the health of Uganda’s economy and how it impacts us.
The author, Oscar S Muwanga is the Head of Markets, Standard Chartered Bank Uganda.
