By Silvia Nyambura
Bank of Uganda (BOU) has cut the Central Bank Rate (CBR) by 1 percentage point to 14%. This may or may not have an effect on commercial banks’ lending rates which currently stand at between 22% and 25%. According to BOU governor Emmanuel Mutebile, Uganda is a free market economy and therefore the central bank cannot pressurize banks to reduce interest rates.
Releasing the monetary policy for the 2 month period ending August at the bank’s headquarters in Kampala this afternoon, Mutebile said, “We hope that with the lowering of CBR, banks will look at the signals and lower interest rates.”
The reduction was attributed to a low inflationary trend that began at the end of December 2015. Annual headline and core inflation declined to 5.1% and 5.6% respectively in July 2016 from 5.9% and 6.8% in June 2016.
“The stability of the exchange rate, lower fuel and subdued domestic demand have contributed to the gradual dampening of inflation pressures over the last seven months. BOU’s high frequency measure of economic activity for July 2016, indicates a recovery in the fourth quarter of the financial year. We project the economy will grow at about 5.5% compared to the preliminary estimate of 4.6% for FY 2015/16. This will be supported by recovery in private sector credit growth and higher public infrastructure spending,” he explained.
This outlook is however subject to several risks emanating from both the external environment and the domestic economy. Uncertainty over international developments has increased which could affect the exchange rate. In addition, weather related risks could affect food prices heightening the upside risks to domestic inflation.
“Given this forecast we believe that a continued easing of monetary policy is warranted. This will help to support a recovery of private sector credit and hence support real economic growth,” said Mutebile.