By Ronnie Wonder
Bank of Uganda (BoU) is to raise the Central Bank Rate (CBR) by 1 percentage point to 13%, up from 12%, citing upside risks to inflation.
Notably, core inflation rose to 4.8% in May 2015, up from 4.6% in April driven by the pass-through effects of the exchange rate depreciation on the prices of imported goods. Annual headline inflation also rose to 4.9%, up from 3.6% in April.
While releasing the Monetary Policy Statement for June, 2015 at the bank’s offices in Kampala yesterday, Prof. Emmanuel Mutebile, the BoU Governor stressed that aggregate demand has improved though exports of goods and services remain depressed which is a key drag on aggregate demand.
“Indicators of economic activity point to a relatively strong real Gross Domestic Product (GDP) growth in the fourth quarter of 2014/15, supported by faster growth in private sector borrowing and a recovery in the agricultural sector,” Mutebile said
Real GDP growth is projected at 5.3% for 2014/15 and 5.8 percent for 2015/16 driven by higher public investments as was announced in the budget and a rebound in private sector demand.
According to the Governor, BOU projects the current account deficit to widen to 10.3% of GDP in 2015/16 from 8.4% in 2014/15 on account of higher non oil private sector imports and public infrastructure related imports. The deficit is also attributed to lower personal transfers and weak exports owing to subdued global commodity prices and lower aggregate demand in key export markets.
Annual core inflation is now projected to rise to 8-10% by the end of 2015/16, an increase largely attributed to currency depreciation and inflationary expectations. In such circumstances, an increase in the CBR is appropriate given high inflationary pressures and the expected strengthening in demand, and to ensure that medium term inflation converges towards BOU’s policy target of 5% during the course of 2016/17.
“BOU will tighten monetary policy further should there be deterioration in the inflationary outlook,” said Mutebile.