In an effort to boost private sector borrowing, the Bank of Uganda (BoU) has reduced its Central Bank Rate (CBR) by 1 percentage point to 10 percent in June 2017, a Monetary Policy Statement issued by the bank’s Governor, Professor Emmanuel Tumusiime-Mutebile, reads.
Mutebile says that the further cut in the CBR should encourage commercial banks to cut their prime rating rates downward to encourage private borrowing, noting that the average lending rates have been declining to 20.5 percent in April 2017 from a peak of 25.2 percent in February 2016, a cumulative decline of 4.7 percentage points.
Stanbic Bank is the only one so far that has cut its prime lending rate to 19%, as the lowest. Other banks are reluctant to reach this level.
Mutebile also confirmed the annual inflation as measured by the change in consumer price index (CPI) increased to 7.2 percent in May 2017, from 6.8 percent in April 2017, largely driven by a sharp increase in food crops and higher energy prices.
Food crops inflation rose to 23.1 percent from 21.6 percent in April 2017, largely on account of the impact of adverse weather conditions on food crop production, Mutebile states in the press release.
The Governor says the relative stability of the exchange rate and subdued domestic demand have contributed to the dampening of core inflationary pressures over the last 12 months, adding that the economy continues to grow at a moderate pace.
According to the latest gross domestic product (GDP) estimates released by Uganda Bureau of Statistics (UBOS), the economy is estimated to grow by 3.9 percent in the Financial Year 2016/17 compared to a growth rate of 4.7 percent in the Financial Year 2015/16.
The slowdown is mainly due to the drought that affected agricultural production, coupled with slow implementation of public investment projects and weak private sector credit growth.
Mutebile says that economic growth is projected to pick up to 5.0 percent in Financial Year 2017/18; supported by improved efficiency and effectiveness in implementation of public investments; higher Foreign Direct Investments, particularly in the oil sector; and recovery in private sector credit growth, as lending interest rates continue declining.
Growth in the agricultural sector is also projected to improve, as normal weather conditions return.
According to Mutebile, the supply side shock that caused inflation to edge-up in the last six months is temporary and is expected to wane in the first quarter of 2017/18. Moderation of food prices is expected over the near to medium-term, he adds.
In addition, Mutebile says, the favourable inflation outlook is to be driven by downward revisions to international oil prices that should lower fuel prices in Uganda as well
“In line with the previous forecast, inflation is forecast to stabilise around the target of 5 percent in 12 months,” he says.