Central Bank lowers base rate amidst economic slowdown

October 8, 2019 in Business, Financial Services, Markets, Policy by Editor

Prof. Mutebile said lower interest rates will help reduce the output gap in the economy despite relatively low levels of inflation.

October 8—Bank of Uganda (BoU) has reduced the Central Bank Rate (CBR) from 10 pc to 9 percent in a bid to limit the adverse effects of a slowing economy.

“The economy still had spare capacity and lower interest rates will help reduce the output gap. It is against this backdrop that BoU had decided to reduce the CBR by 100% points to 9%,” BoU Governor Prof. Emmanuel Tumusiime Mutebile said on Monday.

The up or down movement of commercial banks’ prime lending rates depend on the prevailing CBR. Mutebile said due to a combination of linking fiscal and current account deficit, combined with public domestic financing needs has exerted pressure on the lending interest rates which has lead to a reduction in economic growth and hence the need to reduce the CBR to encourage private sector borrowing.

He said, “The recent released quarterly GDP estimates by Uganda Bureau of Standards indicate that GDP growth slowed down in the second half of 2018/2019. Also BoU’s high frequency indicator of economic activity, the composite index of economic activity, (CIEA) points to a moderation of economic activity in the same period.”

However the band on CBR will remain at +/-3 and the margin on the rediscount rate and bank rates will remain at four and five percentage points on CBR respectively.

This latest decision by the BoU Monetary Policy Committee comes when inflation remains subdued with the annual headline rate at 1.9% in September compared to 2.1% in August and the core inflation at 2.5% from 2.7%.

The reduction in inflation is attributed to relatively strong shilling and moderation of domestic demand as well as the reduction in food prices. However, energy fuel and utilities inflation increased slightly.