Bank of Uganda cuts benchmark interest rate to 12%

The Bank of Uganda on Wednesday lowered the central bank rate by 100 basis points from 13%, set in October, to 12%. The bank’s monetary policy committee said the cut was necessary to “keep the domestic economic growth momentum.”

The decision was irrespective of back-to-back rises in core inflation, which the bank closely watches, with the monetary policy statement saying it is forecast to remain around the 5% target over the next 12 months.

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It is the fifth consecutive rate cut this year, following reductions in April, June, August, and October.

The statement explaining the decision said the “domestic economy is continuing to grow moderately driven mainly by public investment.” Even then, some indicators show that there are restraints to this growth – justifying the bank’s stimulus.

The bank’s composite indicator of economic activity dipped in October after improvements in August and September. Additionally, “the outlook for private investment remains subdued, although measures of business sentiment remain above average,” according to the monetary policy statement.

Risks to near-term growth are mostly external, according to the central bank. They include slower growth in Uganda’s trading partners which will affect earnings from growth and volatilities in the exchange rate arising from “continuing uncertainties in global economic and policy environment.”

Inflation will also increase in the short term due to a rise in the prices of food and fuel prices, but the bank sees core inflation settling around the target in 12 months.

The rediscount rate and bank rate were also each reduced by 100 basis points to 16% and 17%, respectively. The band on the central bank rate was maintained at +/-3%, and the margin on the rediscount rate at 4% on the CBR.