KAMPALA-The Bank of Uganda [ BoU ] has in the Monetary Policy Statement [MPS] for October 2022, raised the Central Bank Rate [CBR] to 10 percent from 9 percent previously.
That followed a rise in inflation for September to 10 percent from 9 percent in annualized August 2022.
Deputy Governor Michael Ating-Ego said BoU would raise the CBR further if inflation continues to go up.
Their inflation target is five percent.
Central banks set benchmark interest rates to guide borrowing costs and the pace of economic growth. Lower rates spur growth while higher ones restrain spending, investment, and stock market valuations.
BoU said global factors, the recent drought and a weaker shilling were to blame for the rising inflation, now at its highest level in 10 years.
Annual core inflation — which excludes the volatile food and energy prices — rose to 8.1 percent in September 2022 from 7.2 percent before that.
BoU forecast a rise in headline inflation in the coming months to average 7.3 percent for calendar 2022. Their estimation for 2023 is a higher 8-10 percent range as none of the causative factors is expected to change much.
Uganda’s inflation is however expected to come down in 2024 as current negative factors begin to ease, BoU said.
“The outlook for inflation is highly uncertain as several risks lie ahead. The balance of risks is tilted upwards,” the bank said in a statement.
BoU listed the upside risks as escalation of geopolitical tensions and the associated supply chain disruptions, stronger monetary policy tightening by major central banks worldwide, further weakening the exchange rate, and the impact of adverse weather conditions locally.
On the other hand, inflation could fall if the world economy goes into recession following this sustained fight against inflation, a faster decline in commodity prices, and lower domestic demand due to declining real incomes.
That aside, the central bank said Uganda’s economy now showed signs of recovery from earlier shocks.
Increased industrial activity had helped raise the Composite Index of Economic Activity marginally by 1.2 percent in the quarter to August from 1.1 percent in the quarter to May 2022.
BoU expects economic growth to remain below its long-run trend until 2026.
“The risks of global recession and tighter financial conditions will likely weigh on domestic economic growth.”
The central bank cites the potential for a sustained weakening of the shilling exchange rate, lower foreign reserves and constrained demand for Uganda’s exports could add to the external financing strains.
Higher domestic interest rates, declining private sector credit and tight fiscal policy could further weigh down economic growth in the country.
Meanwhile, BoU projects inflationary pressures to peak in the first half of 2023, as Covid-19 effects wane, supply chain pressures cease and as a result of the impact of recent policy actions.
BoU said the recent increases in the CBR coupled with the fiscal tightening have had somewhat an indirect effect in stabilising the shilling exchange rate, which is expected to cushion inflationary pressures.
“Indeed, growth in private sector credit and monetary aggregates have moderated, signaling the eventual impact on aggregate demand,” BoU said, adding inflationary pressures remain elevated.
https://thecooperator.news/bou-ramps-up-cbr-again/
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