The Bank of Uganda on Thursday kept its key policy rate unchanged to provide more economic stimulus amidst volatile demand, sluggish private sector borrowing, and the “difficult conditions” faced by certain sectors due to coronavirus restrictions.
The bank’s monetary policy committee said that it will keep the central bank rate unchanged at 6.5 per cent, and the rediscount rate and bank rate at 9.5 per cent and 10.5 per cent, respectively.
A statement released to explain the committee’s decision noted that there is “a persistence of high uncertainty and that economic and financial conditions are expected to remain volatile in the short to medium term.”
The central bank said that although economic activity has picked up in the last two months – after taking a hit from Covid-19 restrictions imposed during the second wave – “the virus continues to pose uncertainty in the near-term economic outlook.”
“Furthermore, private sector credit extension remains sluggish due to perceived risk that continues to significantly impair private investment, compromising the quality of financial market information and lenders’ ability to assess the viability of borrowers and investment projects,” said the statement.
The bank added that its credit relief measures, instituted last April to ease the impact of the coronavirus pandemic on the private sector, expired on 30 September. It, however, promised to extend the interventions to sectors still under lockdown on a case-by-case basis.
BoU’s liquidity assistance programme to support financial institutions through the pandemic will however continue “to ensure financial stability until the economic situation normalises,” the bank said.
The bank said it expects the economy to expand in the range of 3.5-3.8 per cent in the financial year that began in July, lower than its last forecast in August. Economic growth will be driven by “the release of pent-up demand, a boost to investment activity from government’s focus on infrastructure, support to sectors that have been more adversely affected by the pandemic, and accommodative monetary conditions.”
The MPC’s inflation expectations are benign, and see it staying below the 5 per cent target in the short term – “as excess capacity continues to exert downward pressures on prices” – and rise but not exceed the target in the medium term. Still, the projection is hinged on how the coronavirus plays out and “the efficacy” of the government’s vaccine rollout.
Inflation could rise on an increase in global producer prices, food prices, and international commodity prices, especially of oil and other inputs. The central bank also warned that the risk of “currently elevated inflation in most of the advanced economies” could prompt it to abandon its accommodative policy stance to discourage capitals outflows and shore up the value of the shilling.
