The Bank of Uganda (BoU) yesterday reduced its Central Bank Rate (CBR) by 1 percentage point to 9% from 10% in response to the expected path of macroeconomic indicators and the international economic environment.
“The inflation outlook has been revised downwards compared to the August 2019 round of forecast. Annual core inflation is now projected to remain below the 5% target until the fourth quarter of 2020,” said Emmanuel Tumusiime Mutebile, Governor of Bank of Uganda during a press conference to announce the new Central Bank Rate.
Mutebile said Uganda’s economy has continued to grow but at a slow rate and that the economic activity slackened in the first half of 2019 compared to the second half of 2018. He projects the annual core inflation to remain below 5% until 2020.
“The economy still has spare capacity and lower interest rates will help reduce the output gap. Against this backdrop, the BoU has decided to reduce the CBR by 100 basis points to 9%.
“The band on the CBR will remain at +/-3 percentage points and the margin on the rediscount rate and bank rate will remain at 4% and 5% points on the CBR respectively. Consequently, the rediscount rate and the bank rate have been set at 13% and 14% respectively,” said Mutebile.
He added that the risks to the inflation outlook in the near term (12 months ahead) are assessed to be largely on the downside and inflation is forecast to converge to the target of 5% of medium-term (2-3 years).
“Demand-side pressures remain subdued. In the absence of shocks, the relative stability of the exchange rate is expected to continue,” he noted.
Mutebile stressed that the BoU believes that the benign inflation outlook provides room for a reduction in the policy rate to support economic growth.
He asserted that BoU will continue to monitor emerging price and output developments to ensure that monetary policy decisions remain consistent with price stability while being supportive of sustained non-inflationary economic growth over the medium term.
In regards to imports and exports, Adam Mugume the Head of Research at the Bank of Uganda noted that there is still a trade deficit.
“Exports without gold declined by 12% in the 12 months to August, imports grew by a margin of 0.4% in the 12 months to August.
“Lending interest rate to average up to the quarter of August 2018 was 20.2%, increasing from 19.8% in the quarter to May 2018, we are still off on current account deficit around 3 billion dollars and is partly financed by the surplus on financial account giving us almost 2.8 billion dollars in 12 months to August.
“So we still have some favourable developments on financial accounts including FDIs and loans for project, but the challenge still comes from the trade side giving us current account deficit of 3 billion dollars which is around 10% to 12% GDP,” Mugume said.
“Kenya’s gross is still at 5.8% according to FY 2018/19 which is very strong for Kenya’s economy, so if the down-sliding is of recent, it is likely to affect gross going forward in Kenya and slightly in Uganda.
“From the surveys, we have conducted, it shows that Kenyan firms prefer to do value addition from Uganda rather than Kenya, so on one hand, you’ll notice that some activities are booming due to value addition in Uganda,” said Mugume.
About the newly licensed two commercial banks, Charles Owiny Okello from the Supervision Directorate in Bank of Uganda said, “Bank of Uganda licensed the two institution after vetting the applications and finding out that those two financial institutions meet the requirements of the law especially the Financial Institutions Act, the shareholders, the board and senior management are fit and proper people to operate a financial institution in Uganda.”
BY FRANK SEMATA