KAMPALA – Bank of Uganda (BOU) during the Monetary Policy Committee (MPC) meeting last month resolved to maintain the Central Bank Rate (CBR) at 6.5 percent.
“Economic activity is gradually normalising after the second wave of COVID-19. Indeed, the high-frequency indicators of economic activity for October and November 2021 suggest that the economy had considerable momentum into the fourth quarter. Although the resurgence of the Covid-19 variants has undoubtedly clouded the near-term outlook, the economic growth momentum is still expected to improve, supported by expansion in global demand, higher private sector expenditure and continued policy support. If the economy is fully opened in 2022, as currently being projected, this will release some of the pent-up domestic demand from the past two years that should stimulate economic activity. Casting uncertainty over the outlook are the COVID-19 variants like Omicron and whatever variant follows it, and on which additional containment measures are taken,” said Prof. Emmanuel Tumusiime Mutebile, Governor.
Mutebile, in a statement said that risks to the growth outlook, however, remain tilted to the downside, consisting of, weakerthan-expected global economic growth due to supply-chain disruptions and the Omicron variant that has injected renewed uncertainty to the global economic picture.
“Persisting global supply chains disruptions could spawl into the domestic industry, which could weigh on the economic performance.”
In addition, Prof. Mutebile said that a third wave of COVID-19 outbreak could trigger a need for more stringent and protracted containment measures that would drag growth down. “Moreover, some contact-intensive sectors, especially education and hospitality that faced the brunt of the pandemic continue to face challenges. Additionally, import growth is expected to outpace export growth due to recovery in import-intensive household consumption and private investment. As a result, the contribution of net exports to GDP growth will be negative for an extended period. Furthermore, although the fiscal thrust remains positive in FY2021/ 22, its contribution to GDP growth is lower than last financial year owing to the limited fiscal space to support further increases in government expenditure.”
According to the Central Bank, the annual headline inflation and annual core inflation each rose to 2.6 percent in November 2021, from 1.9 percent and 2.1 percent in October 2021, respectively.
“The upturn has largely been driven by rapidly rising energy and food crop prices. Energy, fuel, and utilities (EFU) inflation rose to 2 percent in November 2021 from minus 0.2 percent in October 2021, while food crops and related items inflation rose to 3.6 percent from 1.7 percent in the same period. Inflation forecasts in the near term (12 months ahead), amid high uncertainty, suggest that inflation will likely continue to rise as the economy recovers further and spare capacity is gradually absorbed. The rise in inflation will also reflect strong producer price inflation domestically and abroad and import prices. In the medium-term (2-3 years ahead), as demand recovers with the full reopening of the economy and the release of pent-up demand, inflation is forecast to rise but stabilize around the 5 percent target, contingent on the evolution of the pandemic and the efficacy of vaccines.”
“The uncertainties and risks of the forecast are two-sided and the MPC assess them as being inflationary overall. The most significant risk is the duration of disruptions to the global production chain and related stronger inflation pressures globally. Sffonger global cost-push inflation pressures, stemming from sharply rising prices and limited supply of production inputs could result in higher domestic inflation, especially so, if combined with a weaker shilling. If the exchange rate were to depreciate significantly, partly on account of monetary policy normalisation in advanced countries, this would increase the overall inflation pressures and foster a need for higher interest rates. On the downside, a faster resolution of global supply chain disruptions, lower international Commodity pricesr and another season of good food crop harvest could cause inflation to remain subdued,” said Central Bank boss.
The MPC assessed that because of the excess capacity, the economy continues to require considerable monetary policy support. Based on the current assessment of the outlook and balance of risks, the MPC judged that keeping CBR unchanged at 6.5 percent would be consistent with meeting the inflation target of 5 percent sustainably in the medium term. The band on the CBR is also maintained at + / -2 percentage points on the CBR and the margins on the rediscount rate and bank rate have been kept unchanged at 3 and 4 percentage points on the CBR, respectively. Consequently, the rediscount rate and the bank rate have been maintained at 9.5 per cent and 10.5 per cent, respectively.
“The BOU will continue with interventions for those sectors that remain under lockdown. Furthermore, BOU will maintain the COVID-19 Liquidity Assistance program (CLAP) to ensure financial stability until the economic situation normalises.”