The Bank of Uganda has increased the Central Bank Rate (CBR) to 10 per cent amid low economic growth fuelled by rising inflation.
While releasing the Monetary Policy Statement for October 2022 on Thursday, Dr Michael Atingi-Ego, the Deputy Governor, said they are increasing the lending rate because economic growth is expected to remain below its long-run trend until FY 2025/26.
“The outlook for inflation is highly uncertain as several risks lie ahead. The balance of risks is tilted upwards,” Dr Ego said in a statement.
He said the upside risks include: the entrenchment of higher inflation expectations, escalation of geopolitical tensions and the associated supply chain disruptions and stronger monetary policy tightening by major central banks further weakening the exchange rate, and the impact of adverse weather conditions on food production.
“The risks of global recession and tighter financial conditions will likely weigh on domestic economic growth. Moreover, the potential for a sustained weakening of the shilling exchange rate coupled with lower foreign exchange reserves and constrained demand for Uganda’s exports could add to the external financing strains,” he explained.
“The risks of global recession and tighter financial conditions will likely weigh on domestic economic growth. Moreover, the potential for a sustained weakening of the shilling exchange rate coupled with lower foreign exchange reserves and constrained demand for Uganda’s exports could add to the external financing strains,”said Michael Atingi-ego.
In addition, he said, higher domestic interest rates, declining private sector credit and tight fiscal policy could further weigh down economic growth.
However, he said the domestic economy, which has weathered several shocks, is showing signs of recovery.
“The Composite Index of Economic Activity (CIEA) grew slightly by 1.2 percent in the quarter to August from 1.1 percent in the quarter to May 2022, supported by increased industrial activity. Also, business sentiments have improved since the previous forecast round,” the Deputy Governor said.
The move by the central bank comes after the annual headline inflation rose to 10 percent in September 2022 from 9 percent in August 2022.
The rising of interest rates increases the cost of borrowing, making both credit and investment more expensive.
The band on the CBR remains at +/-2 percentage points. The margins on the CBR for the rediscount and bank rates will remain at 3 and 4 percentage points. Consequently, the rediscount and bank rates will be 13 percent and 14 percent, respectively.