Inflation concerns cause Bank of Uganda to keep base rate at 10.25%

June 6, 2024 in Finance, Policy by Editor

Atingi-Ego said uncertainties persist around the inflation outlook, including the potential impacts of an escalation in the ongoing geopolitical tensions in the Middle East, possible energy price hikes, and unfavourable weather patterns.

Bank of Uganda (BoU) is maintaining the Central Bank Rate (CBR) at 10.25pc after the latest sitting of the Monetary Policy Committee (MPC) decided to be cautious in light of the inflation outlook.

Michael Atingi-Ego, the BoU Deputy Governor and MPC Chair said, “Uncertainties persist around the inflation outlook, including the potential impacts of an escalation in the ongoing geo-political tensions in the Middle East, possible energy price hikes, unfavourable weather patterns affecting food supply and production capacity pressures.”

He said, “Materialisation of these risks could imply stronger inflationary pressures. Additionally, persistent global inflation and higher interest rates could cause heightened volatility in capital flows and the exchange rate, resulting in higher domestic inflation than currently assumed. Conversely, inflation may undershoot projections if monetary policy reduces demand more than anticipated or global demand weakens further, resulting in lower imported inflation”

In a mid-week statement the MPC conceded that Uganda’s inflation remains among the region’s lowest with an average 3.2pc in the 12 months to May 2024 Nonetheless, annual headline inflation rose to 3.6pc in May 2024 from 3.2pc in April 2024, while core inflation increased to 3.7pc from 3.5pc.

The inflation uptick is primarily driven by rising healthcare, education, and transportation service costs, coupled with higher prices for solid and liquid fuels. Services inflation has climbed to 6.2pc from 5.4pc. Similarly, electricity, fuel and utilities (EFU) inflation has risen to 9.5pc from 7.4pc, reflecting recent increases in international energy prices and lagged effects of the shilling’s past depreciation. However, tight monetary conditions, declining global inflation, and a favourable domestic food supply have partially offset inflationary pressures.

Atingi-Ego said, “However, risks to the growth outlook remain. Uncertainty about the global economic situation and a stronger shilling depreciation could weigh on domestic demand. Private sector credit could weaken further due to tighter domestic financing conditions, resulting in lower demand. External factors such as a weaker global economy and escalating geopolitical conflicts cold further impede growth through supply chain disruptions, higher freight costs and reduced export demand.”

He said on a positive note, more favourable weather conditions leading to good food crop harvests, higher government and private sector investment in the extractive industry, and government intervention programs, could boost economic activity. “The MPC assessed that while the near-term balance of risks around inflation remains skewed to the upside, the current monetary conditions are adequate to contain inflation round the medium-term target of five percent. As a result the MPC maintained the CBR at 10.25pc.”