The Bank of Uganda (BoU) has reduced the Central Bank Rate (CBR) by one percentage point to nine percent in response to the expected path of macroeconomic indicators and the international economic environment.
According to the October 2019 Monetary Policy Committee (MPC) report released by the governor of BoU, Emmanuel Mutebile, the economy continues to grow but at a slowing rate and economic activity slackened in the first half of 2019 compared to the second half of 2018.
“The outlook is uncertain, particularly as a result of the unfavorable global economy. Moreover, a combination of widening fiscal and current account deficits, coupled with public sector domestic financing needs, could exert pressure on the lending interest rates leading to further moderation of economic growth.” Mutebile said
The recently released quarterly GDP estimates by Uganda Bureau of statistics (UBOS) indicate that GDP growth slowed in the second half of Financial Year (FY) 2018/19.
The Consumer Price Index (CPI) data for September 2019, released by UBOS, indicates that inflation remained subdued. Annual headline and core inflation declined to 1.9 percent and 2.5 percent, respectively from 2.1 percent and 2.7 percent in August 2019.
The decline in inflation was in part driven by a relatively stronger shilling, moderation of domestic demand and lower food prices. Food crops inflation declined from minus 1.4 percent in August 2019 to minus 3.0 percent in September 2019. However, Energy Fuel and Utilities (EFU) inflation rose to 2.5 percent in September 2019 from 1.0 percent in August 2019.
He said the inflation outlook has been revised downwards compared to the August 2019 round of forecast. Annual core inflation is now projected to remain below the 5 percent target until the fourth quarter of 2020. The risks to the inflation outlook in the near term (12 months ahead) are assessed to be largely on the downside and inflation is forecast to converge to the target of 5 percent in the medium-term (2-3 years). Demand side pressures remain subdued. In the absence of shocks, the relative stability of the exchange rate is expected to continue.
The BoU believes that the benign inflation outlook provides room for a reduction in the policy rate to support economic growth. The economy still has spare capacity and lower interest rates will help reduce the output gap. Against this backdrop, the BoU has decided to reduce the CBR by 100 basis points to 9 percent.
The band on the CBR will remain at +/-3 percentage points and the margin on the rediscount rate and bank rate will remain at four and five percentage points on the CBR, respectively. Consequently, the rediscount rate and the bank rate have been set at 13 percent and 14 percent, respectively.
“The BoU will continue to monitor emerging price and output developments to ensure that monetary policy decisions remain consistent with price stability while being supportive of sustained noninflationary economic growth over the medium term,” he said at BoU headquarters.