The Bank of Uganda will keep its benchmark interest rate at 9.5 per cent in the first half of this year due to rising inflation. However, it will cut the rate by 1 per cent by the end of the year as inflation stabilises below its 5 per cent target, according to BMI, the global research firm.
BMI said the central bank would hold its policy rate in the coming months to support the shilling, which has fallen 5.8 per cent against the dollar since last August following punitive measures by the World Bank and the US government in response to the anti-homosexual bill and rising interest rates in Western economies. BoU “will refrain from cutting the policy rate until developed markets, most notably the US, commence monetary easing cycles,” it said.
Last month, the central bank rate was maintained at 9.5 per cent at the bank’s third meeting since August, when it cut the rate by 0.5 per cent. Although inflation rose in the two months to February, BoU said its forecasts showed that it would remain within its target over the next one year. And by deciding to keep rates on hold, the bank signalled that its concerns about the economy currently outweigh those about inflation.
The BoU will keep its benchmark interest rate at 9.5 per cent in April, BMI said in a research note. “Over the coming months, we expect price growth to accelerate further, although we do not expect inflation to breach the BoU’s 5.0 per cent medium-term target. Seasonal factors, including the April-May agricultural lean period, will see food inflation rise Q224, while increased global shipping costs related to Houthi attacks in the Red Sea will exert upside pressure on import prices in the near term.”
The easing of interest rates in the second half of the year will come on the back of expected policy easing in the US, giving the Bank of Uganda room to follow suit without reducing the attractiveness of the shilling’s carry trade, BMI said.
The potential for rate cuts beyond those predicted by BMI is tempered by the fact that the Ugandan economy is expected to outperform its peers, at least according to the purchasing managers’ index, the note said. This growth in private sector activity will be driven by private consumption and investment.
