Bank of Uganda found more room to cut its benchmark rate on concerns about sluggish private sector credit growth and the cost of loans.
The central bank rate was cut by 0.5% from to 9%, the Bank said at a press briefing on Tuesday. Set last October and maintained at the December monetary policy committee meeting, the 9.5% rate was the lowest the committee had set since Bank of Uganda adopted an inflation targeting monetary policy framework in July 2011.
The decision reflects the Bank’s concern about commercial bank lending to the private sector, which is expanding below expectations, and the cost of those loans.
“The growth of private sector growth remains below historic levels,” the monetary policy statement said. “The cost of credit remains relatively high for micro and small loans while the cost to corporates have declined.”
In December’s monetary policy report, the bank acknowledged that its key rate can only do so much to ramp up the growth of private sector credit growth, especially given that it started the expansionary policy in April 2016.
“Modest private sector credit growth in an environment of sustained monetary policy easing in part reflects a raft of supply-side constraints and implies that monetary policy alone cannot generate the much-needed boost to economic growth,” the report said.
The biggest risk to private sector credit growth was risk aversion by commercial banks due to increases in non-performing loans, according to the report. The monetary policy statement notes, however, that non-performing loans as a share of total loans have declined from a peak of 10.5% in December 2016 to 5.6% in December 2017. This “should support credit extension.”
The Bank added a caveat to that expectation: public investment programmes will most likely crowd out private sector borrowing since banks will be more keen to lend to the government.
Nevertheless, the central bank said it expects economic growth to pick up in the next five years, averaging 6.3%, and mainly supported by public investments, increased consumption, and improved agricultural productivity.
Growth in gross domestic product is projected at between 5-6% in 2017 compared to 2.5% in 2016, according to the central bank’s high-frequency indicator of real economic activity. There are also indications of a turnaround in private investment activity, with foreign direct investment growing 18.5% in 2017 from a contraction of 30.5% the previous year.
Other positive signs from 2017 pointing to a strengthened economy are an increase in the imports of raw materials and capital goods – 17.4% growth compared to a decline of 21.1% in 2016, and a rise in shilling-denominated loans by 10.8% in December 2017 compared to 7.9% in December 2016.
The Bank forecasts economic growth in the range of 5-5.5% for the current financial year, which is “a positive payoff for the current stimulatory monetary policy”.
The band on the CRB was maintained at +/-3% and the margin on the rediscount rate at 4% on the CBR. The rediscount rate and the bank rate were reduced by 0.5% to 13% and 14% respectively.