Bank of Uganda cuts policy rate by 0.5%

Central Bank also downgrades 2016/17 growth forecast

Bank of Uganda on Wednesday lowered the central bank rate by 0.5% to 11.5% from the 12% set in December. The cut was necessary to “support economic activity”, according to the Monetary Policy Statement.

It is the sixth consecutive cut since the central bank started easing the policy rate in April 2016.

The bank is concerned about lower economic growth, which was “weaker than expected in the first half of FY 2016/17” on the back of the ongoing drought.

Figures from the Uganda Bureau of Statistics show that real GDP growth contracted by 0.2% in the first quarter of 2016/17 – the second decline in 11 quarters – with shrinking value in the agricultural sector causing the decline. There was also a slowdown in economic activity in the quarter to December 2016, according to the policy statement.

Although the slowdown in economic growth is due to temporary factors, argues the central bank, it looks likely to persist throughout the year. This prompted the bank to downgrade its GDP growth projection for 2016/17 from 5.0% to 4.5%.

But the “economic prospects are more optimistic for FY 2017/18, with GDP expected to grow at 5.5%, driven by improved public infrastructure investment, a recovery in private sector investment and improvements in agricultural production and consumption,” says the monetary policy statement.

On external factors, the bank is adopting a ‘glass half full’ stance. It expects “the impact of negative external shocks on the economy to be softened going forward,” due to “tentatively improving” global conditions. This is a statement as optimistic as any, given the uncertainty surrounding Britain’s exit from the European Union, the new US administration, and political developments in the region.

Inflation is expected to rise in the near-term, peaking at 8%, the statement says. But the bank maintains its medium-term (12 months) outlook of 5%, saying prices will fall to the target as “potential growth is achieved.”

“The near-term increase in inflation is attributed to the increasing international oil and food prices though it may be constrained by weak aggregate demand,” according to the statement. It adds: “The more favourable shilling exchange rate has been an important factor in offsetting some of the upward pressures on inflation.”

The rediscount rate and bank rate were also each reduced by 0.5 percentage points to 15.5% and 16.5%, respectively. The band on the central bank rate was maintained at +/-3%, and the margin on the rediscount rate at 4% on the CBR.