KAMPALA – Bank of Uganda has lowered the Central Bank Rate (CBR), for August 2023 to 9.5% from 10% for July in a bid to stimulate economic growth amid weak domestic demand.
Addressing the media on Tuesday, August 15, 2023, Deputy Governor Dr Michael Atingi-Ego said while inflation has continued to drop to below 5%, there is weak domestic demand.
“The Uganda Bureau of Statistics (UBoS) data showed quarter-on-quarter average economic growth of -6.5% in the second and third quarters of 2022/23. The agriculture, industry and services sectors posted -21.6%, -2.3%, and -1.3% growth in activity. Private sector credit growth was moderate amidst tightening bank lending standards. In addition, the high-frequency economic indicators pointed to weakening growth momentum during April to June 2023,” Dr Ego said.
The Central Bank Rate is the interest rate at which a nation’s central bank lends money to domestic banks, often in the form of very short-term loans. A higher interest rate means commercial banks also transfer it to borrowers, which in the process stifles private sector growth.
The Deputy Governor explained that the Monetary Police Committee (MPC) noted that the materialisation of the downside risks to economic growth could lead to a sharper decline in GDP growth.
“The current economic forecast suggests that economic activity remaining below capacity over the next two years will exert downward pressure on inflation,” he said.
“In light of this outlook, the MPC decided to lower the CBR to 9.5% aiming to stimulate economic activity while maintaining inflation around the target. The CBR bands remain at -+/-2 percentage points, and the margins on the CBR for rediscount and bank rates stay at 3 and 4 percentage points, respectively. As a result, the rediscount and bank rates are now 12.5% and 13.5%. In addition, the Cash Reserve Requirement (CRR) has been lowered by 50 basis points to 9.5%,” the Deputy Governor added.
After peaking at 10.7% in October 2022, inflation has steadily decreased to below 5%, faster than expected. Annual headline and core inflation dropped to 3.9% and 3.8% in July 2023 from 4.9% and 4.8% in June 2023, respectively. Similarly, food crops inflation declined to 9.3% in July from 12.3% in June 2023. The deflation of energy, fuel, and utility costs was -1.6% in July from -3.1% in June 2023 and services inflation averaged 3.1% from April to July 2023.
Dr Ego explained that the decline in inflation was due to tighter monetary and fiscal policies, strengthening of the shilling exchange rate, lower energy and food prices, improved global supply chains, and reduced domestic demand.
“Also, the drop in inflation was driven by base effects as the prices are now lower than they were at the same time last year,” he said.
He said the downward inflation trend is predicted to continue in the coming months due to lower international food and fuel prices, better agricultural supply, and decreasing inflation expectations.
However, he said advanced economies will likely maintain tight monetary policies, which might cause currency volatility as foreign investors in local markets seek high returns abroad. Nevertheless, the exchange rate is expected to remain stable.
The Deputy Governor also warned that there are still risks despite improvements in near-term inflation projections compared to June 2023.
On the upside, he said, external risks could drive inflation higher. Factors like ongoing geopolitical conflicts, rising commodity prices, or disruptions in global trade could push up inflation. Sticky inflation in advanced economies might also mean higher interest rates, which could affect economies needing foreign capital as well as their exchange rates. Also, adverse weather could keep food prices elevated.