Bank Of Uganda Increases Lending Rate to 10.25%

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The Monetary Policy Committee (MPC) of Bank of Uganda has today, Monday increased the Central Bank Rate (CBR) to 10.25% from 10%.

This highlights the instability of the Ugandan shilling, which has not stabilized against the U.S. dollar for several months.

The Ugandan shilling’s value against the U.S. dollar remains on a downward trajectory. In the trading session on Monday, April 8, 2024, the shilling closed at a lower point, with buying and selling rates at Shs3,806.75 and Shs3,816.75, respectively.

The decision by the Central Bank to increase the CBR indicates continued difficulties for the Ugandan currency in preserving its value compared to the dollar, hinting at underlying economic factors in play.

Michael Atingi-Ego, the Deputy Governor of the Bank of Uganda, said that the recent rise in the CBR (from 9% in February to 10% in March) has contributed to stabilizing the exchange rate of the shilling.

“However, the shilling remains vulnerable due to outflows of short- term foreign investor funds from the domestic market in search of attractive yields in other markets and strong domestic demand by corporates. The weakening of the shilling significantly impacts domestic prices, which could push inflation higher,” he said.

Central Banks also raise the Central Bank Rate to tackle inflation by raising borrowing costs, which then decreases consumer spending and investment, thereby tempering economic activity. This approach is typically employed to uphold price stability and manage inflationary pressures.

Inflation indicators from the Uganda Bureau of Statistics for March 2024 reveal a marginal decline in headline inflation to 3.3% from 3.4% in February 2024.

Atingi-Ego said that this decrease is primarily attributed to the reduction in food crop inflation, which declined to -0.4% from 0.5%.

“Conversely, services inflation experienced a slight increase to 5.5% from 5.4%, while core inflation remained steady at 3.4%. The prevailing conditions of reduced aggregate demand and increasing supply are mitigating strong inflationary pressures; however, risks of elevated inflation persist,” said Atingi-Ego.

“The evolution of inflation remains challenging, influenced by factors such as the shilling exchange rate, supply-side shocks, global inflation, and domestic food supply. Forecasts have been adjusted downwards compared to the previous round, largely due to the relative stability of the shilling exchange rate. However, short- term projections indicate inflation may rise to between 5.5% to 6% within 12 months ahead, with a return to the medium-term target of 5% anticipated in the second half of 2025,” he added.

The Deputy Governor also said that the significant upside risks to the inflation outlook persist, including geopolitical tensions in the Middle East, potential energy price hikes, tighter global financial conditions that could lead to a stronger depreciation of the shilling exchange rate, and unfavourable weather patterns.

A further rise in inflation may dampen household real incomes, leading to reduced consumer spending, while high raw material import costs could constrain investment expenditure. Shortfalls in tax revenue relative to targets may necessitate tax hikes or increased domestic financing, which could potentially crowd out private sector credit growth.

External factors such as a weaker global economy or escalated geopolitical conflicts could further impede growth through disruptions to supply chains and reduced export demand.

“Considering the persistent upside risks to inflation, the MPC deemed it necessary to tighten monetary policy further to anchor inflation around the medium-term target of 5%. Consequently, the CBR has been raised by 25 basis points to 10.25%. The bands on the CBR remain at +/-2 percentage points and the margins on the CBR for the rediscount and bank rates at 3 and 4 percentage points, respectively. As a result, the rediscount and bank rates will be 13.25% and 14.25%, respectively. The increase in the CBR is a prudent measure to address the heightened inflation risks,” Atingi-Ego announced.

“This monetary policy stance balances the need to contain inflation while supporting sustainable economic growth, which is essential for Uganda’s socio-economic transformation. The MPC stands prepared to respond to any materialisation of the identified risks,” he added. 

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