Bank of Uganda has kept it’s policy rate unchanged, pointing to a continued improvement in economic activity and a projected increase in inflation in the next year.
The central bank rate was kept at 9%, with the Bank saying its current cautious expansionary monetary policy is “appropriate given the forecast inflation trajectory and the current state of the economy”.
After two years of gradually bringing down the rate to boost economic activity, the monetary policy statement released today said economic activity continues to strengthen. The latest quarterly GDP figures show that activity increased across all sectors, especially in the industry and service sectors. Growth is also expected to be stronger this financial year at 5.8%, up from last year’s 3.9%.
The economy will further expand in 2018/19, with GDP growth projected at 6%. Medium-term growth prospects “remain favourable supported by the multiplier effects of public infrastructure investments, improving agricultural productivity, an increase in private sector investment and household consumption and strengthening of the global economy.”
Although inflation remains historically low – the annual headline rate came in at 1.7% in May while core inflation was 1.1% -the central bank says it will rise over the next one year due to the strengthening dollar, rising global oil prices, and increased taxes.
“The downward trend in inflation experienced during the course of FY 2017/18 will gradually be reversed, with import prices rising reflecting a combination of a gradual increase in global inflation and the weakening of the shilling,” the statement said.
“In addition, the cyclical pattern of food crop prices suggests that food prices will recover in FY 2018/19, and this coupled with the closure of the negative output gap and the increased taxes should cause inflation to rise. ”
With the economy in good spirits and core inflation still contained, the central bank’s monetary policy committee did not see the need to shift policy gears.