Bank of Uganda lowers base rate to 9.5% to stimulate economy

August 16, 2023 in Finance, Policy by Editor

Private sector consumption, investments in extractive industries and improved exports are anticipated to drive Uganda’s recovery,

The Bank of Uganda (BoU) has decided to lower the interest rate it charges commercial banks in light of falling inflation since last year and the need to stimulate economic activity by lowering borrowing costs.

The Monetary Policy Committee (MPC) this week announced that the Central Bank Rate (CBR) has been reduced to 9.5% from the previous 10%. After peaking at 10.7 pc in October 2022, inflation has steadily decreased to below 5 pc, faster than expected. Annual headline core inflation dropped to 3.9pc and 3.8 pc in July 2023 from 4.9 and 4.8 in June 2023, respectively.

According to Michael Atingi-Ego, the BoU deputy Governor and MPC Chair said, ‘The decline in inflation was due to tighter monetary and fiscal policies, strengthening of the shilling exchange rate, lower energy and food prices, improved global supply chains and reduced domestic demand.”

The MPC believes that this downward inflation trend is predicted to continue in the coming months due to lower international food and fuel prices, better agricultural supply and decreasing inflation expectations. Although global inflation remains relatively high, it’s getting closer to the targets set by central banks in advanced economies. This international trend could help reduce domestic inflation pressures.

However, advanced economies will likely maintain tight monetary policies, which might cause currency volatility as foreign investors in local markets seek high returns abroad. Nevertheless, the exchange rate is expected to remain stable,

Atingi-Ego said, “There are still risks despite improvements in near-term inflation projections compared to June 2023. On the downside, global inflation might continue to decrease, potentially affecting domestic inflation. A significant global economic slowdown could also impact inflation by reducing global demand, leading to lower prices for goods and commodities.”

“Looking ahead, economic growth is expected to recover gradually ranging from five percent to six percent in fiscal yet 2023/24. Private sector consumption, investments in extractive industries and improved exports are anticipated to drive this recovery,” he said.