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BoU holds CBR at 6.5 percent for April 2022

KAMPALA – The Bank of Uganda [BoU] has maintained the Central Bank Rate (CBR) at 6.5 percent. The decision was taken during the Monetary Policy Committee (MPC) meeting of April 2022.

BoU based its decision of maintaining the CBR on the current inflation figures where the Bank explained that the prices of some items have decreased.

“Even though inflation is forecast slightly above the 5 percent target in the medium term, the initial impact of the recent price hikes has not spread across the basket of consumer goods and services. Indeed, the prices of some components of the consumer basket have fallen. As such, inflation expectations remain contained,” BoU Deputy Governor Dr. Michael Atingi-Ego, said as he released the MPC statement in Kampala on Thursday.

According to the MPC, Uganda’s economy continues to recover from the Covid-19 pandemic-related downturn. Annual growth of the real gross domestic product (GDP) was estimated at 5.2 percent in the quarter to December 2021 from 3.5 percent in the quarter to September 2021.

Atingi-Ego said the full reopening of the economy and the diminished impact of the pandemic unlocked the factors that had held back economic activity, though he added there are indications that the risk of weakening growth momentum due to adverse global factors was flagged in February 2022 may have materialized, with economic growth is now projected in the range of 5.5 percent – 6.0 percent in 2022 from 6.0 percent earlier projected.

He said the spike in global geopolitical tensions and supply chain disruptions are likely to hinder the stability and growth of the Ugandan economy.

Inflation has remained below the medium-term [2 – 3 years ahead] target of 5 percent for five years to March 2022, he said, though he noted that inflation has risen in the last two months.

“The annual headline and core inflation rose to 3.7 percent and 3.6 percent in March 2022 from 2.7 percent and 2.3 percent, respectively, in January 2022. This is mainly due to supply chain disruptions that have led to a spike in commodity and energy prices.”

Nevertheless, he said, inflation remains below the target partly because the spike in prices of some commodities such as those of vegetable oil products carry a relatively smaller share of household budgets.

He said the strong shilling exchange rate helped to dampen price pressures, adding that inflationary developments have led to a revision of the outlook for inflation.

“Annual headline and core inflation is now forecast to average 5.2 percent and 4.7 percent, respectively, in 2022, from 4.5 percent and 3.9 percent as had been projected in February.

However, he there are considerable risks surrounding the outlook for inflation with the balance of risks tilted upwards.

The main upward risks he said would include; higher global commodity and energy prices due to worsening of the Russia-Ukraine conflict, and heightened uncertainty in the financial markets due to the sanctions on Russia.

He added that the anticipated tightening of monetary conditions by central banks in advanced economies to contain escalating inflation could drive financial flows from frontier markets like Uganda to the safe-haven U.S. dollar assets, thereby weakening the shilling exchange rate.

He also noted the potential worsening of disruptions to global supply chains due to stringent controls of new strains of the Covid-19 virus e.g., China’s “zero-covid” policy.

The main downside risks include: Diminished domestic demand due to higher energy and commodity prices beyond general affordability and bumper food crop harvests could lead to lower market prices.

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