Bank of Uganda has cut its benchmark lending rate by 100 basis points to 13%, saying its forecast of core inflation will remain around the medium-term target of 5% over the next 12 months. It also cited the need to support domestic economic growth as one of the reasons behind the reduction.
It is the fourth consecutive rate cut this year, following reductions in April, June, and August.
The monetary policy committee’s decision was influenced by declining inflation and an uptick in economic activity, which it said needs to be shored even more. Annual headline inflation fell for the third consecutive month in September, slowing to 4.2%, while core inflation – which is targeted by the Central Bank – also fell to 4.1% year-on-year.
Read More: Inflation falls to 4.2% in September
The slowdown in inflation, according to the policy statement issued by governor Emmanuel Tumusiime-Mutebile, was due to weak consumer demand, decreasing inflation expectations, and a stable exchange rate arising from the tight monetary policy a year ago.
There was also an uptick in economic activity in the fourth quarter of the previous financial year, which continued in the first quarter of the current financial year. The central bank believes that domestic demand will be a key driver of economic growth in 2016/17, thus its concern about weak consumer demand registered last month.
Other risks to growth include weaknesses in the economies of Uganda’s trading partners, particularly South Sudan where instability has led to a drop in exports. Additionally, the committee is wary of the impact of exchange rate pressures and less-than-normal rains on core inflation in the current financial year.
Economic growth is projected at 5.0% in 2016/2017 and 5.0-5.5% in the 2017/18 financial year, according to the statement. The bank also sees a gradual recovery in private sector credit supporting private sector spending and growth.
The rediscount rate and bank rate were also each reduced by 100 basis points to 17% and 18%, respectively. The band on the central bank rate was maintained at +/-3%, and the margin on the rediscount rate at 4% on the CBR.