Central Bank maintains policy rate while admitting easing cycle has had little effect on loan prices

Bank of Uganda has maintained its lowest ever policy rate, citing a projected rise in core inflation, uneven economic growth, and stickily high prices of credit.

The central bank rate was maintained at 9.5% -first set at October’s monetary policy committee meeting when the rate was cut by 0.5% to “boost private sector credit growth and to strengthen the economic growth momentum.”

Although inflation in November declined to a 32-month low, with the closely tracked core inflation also falling to its lowest level since 2014, the Bank says it could rise in the 2018/19 financial year with an increase in food prices and movements in the foreign exchange market.

Core inflation, which is closely tracked by the Bank of Uganda, also declined to its lowest level since 2014. However, the Bank said core inflation will rise to around 5% in 2018/19 as “spare capacity in the economy is reduced” even as the outlook for near-term inflation “remains subdued”.

The upside risks to this outlook include the “future direction of food crops prices and the path of the exchange rate, with the latter contingent on the external economic environment,” the monetary policy statement said.

The statement notes that the cost of commercial bank credit is still high, while non-performing loans also remain high which could hold back bank lending. While this is presented as a risk to the projection that GDP will expand by 5% in 2017/2018, it is also an admission that the Bank’s easing cycle is yet to be as effective as it might have hoped.

The policy rate has been on a downward trend since April 2016 with the central bank hoping that a reduction in commercial bank lending rates will lead to an increase in bank credit to the private sector. The current central bank rate is the lowest since Bank of Uganda adopted an inflation targeting monetary policy framework in July 2011.

The rediscount rate and bank rate were also kept at 13.5% and 14.5%, respectively, while the band on the central bank rate was maintained at +/-3%, and the margin on the rediscount rate at 4% on the CBR.