Bank of Uganda said on Tuesday that economic activity is picking up and stressed the importance of private sector credit growth as it announced a cut in its policy rate to its lowest level ever.
The Bank cut the central bank rate by 50 basis points to 9.5%, after holding it steady in August, saying it seeks to “boost private sector credit growth and to strengthen the economic growth momentum.”
The decision was also influenced by forecasts showing that annual core inflation will remain around its medium-term target of 5% and figures showing that economic activity is slowly gaining momentum, BoU said in the monetary policy statement explaining its decision.
“The latest quarterly GDP data released at end September 2017 by UBOS indicates that growth recovered in the second half of 2016/17,” the central bank said. “Quarterly growth rates of only 0.6% and 1.1% were recorded in the first two quarters of 2016/17,” but growth rates have since “accelerated to 1.8% and 1.9% respectively in the third and fourth quarters of the financial year.”
Growth in private sector credit remains sluggish, however, BoU said. In cutting the rate – which determines the cost of short-term financing to banks – the central bank is hoping that commercial banks follow its lead to lower their lending rates.
Annual domestic credit to the private sector from all financial institutions inched down in July – the latest month for which data is available – growing 5.6% compared to 5.7% a month earlier. On the other hand, commercial bank lending to the private sector rose 5.9% year-on-year in July, the same rate as in June.
Tuesday’s decision shows that the easing cycle which started last April, to stimulate economic growth, is still on. The rate, at 9.5%, is at its lowest level since Bank of Uganda adopted an inflation targeting monetary policy framework in July 2011.
The rediscount rate and bank rate were also each reduced by 0.5 percentage points to 13.5% and 14.5%, respectively. The band on the central bank rate was maintained at +/-3%, and the margin on the rediscount rate at 4% on the CBR.