Bank of Uganda drops base rate by one point to 10%

June 19, 2017 in Finance, Policy by Editor

June 19—Bank of Uganda (BoU) has shown its determination to ease the costs of borrowing by reducing the benchmark Central Bank Rate (CBR) by one point to 10% from the previous 11% announced in April despite a rise of Headline inflation during May.

Announcing the latest deliberations of the Monetary Policy Committee, BoU Governor Emmanuel Tumusiime Mutebile said this rise in inflation was largely due to a sharp increase in food prices and higher energy costs. He said the extended dry spell last year destabilized agriculture.

“Food crops inflation has risen to 23.1% from 21.6% in the month of April. This is largely the impact of adverse weather conditions on production. Also energy, fuel and utilities inflation has risen from 5.3% in April to 7% in May,” Mutebile said.

He said, “However the annual core inflation has remained relatively stable increasing slightly from 4.9% in April to 5.1% in May. This is due to stability of the exchange rate and subdued domestic demand although this contributed to the slowed economy.”

BoU has an inflation-targeting policy with 5% core inflation as the trigger for CBR movements. Mutebile said, “Accordingly, the BoU will reduce the CBR by one percentage point to 10%.”

The country’s gross domestic product (GDP) growth has also declined according to the estimates released by Uganda Bureau of Statistics. The economy is estimated to grow by 3.9% in the 2016/2017 financial year compared to a growth rate of 4.7% in the 2015/2016 financial year. The slowdown has been blamed on drought coupled with slow implementation of public investments project and weak private sector credit growth.

However Mutebile said the economy is expected to pick up in 2017-2018 to 5% if weather conditions stabilize, implementation of public investments projects are efficiently improved and high foreign direct investments particularly in the oil sector are realized. The economy is also expected to benefit from a recovery in  private sector credit and reductions in interest rates due to a drop in government borrowing.

Mutebile said this growth target will be possible with the easing of the monetary conditions. “Average lending rates have declined to 20.5% in April 2017 from a peak of 25.2% in February 2016. Also moderation of food prices is expected over the near to medium term. Once those are controlled, we will see an improvement in economic growth” Mutebile said.