The Bank of Uganda kept all interest rates unchanged in it’s bi-monthly sitting held on Monday in Kampala.
The Bank said the decision is consistent with its neutral monetary policy stance and is in line with keeping core inflation close to the medium-term target of 5% while supporting economic growth.
The policy rate was kept at 9%, its lowest level since the adoption of an inflation targeting lite monetary policy in July 2011 and first set this February. The central bank rate was last raised in October 2015, and has gradually eased since April 2016 in reaction to weak private sector credit growth and slow GDP expansion.
In June, the central bank kept the policy rate constant citing favourable economic growth prospects and inflation within the 5% target range in the medium-term. Even then, inflation was forecast to rise in the period – the Bank’s medium-term horizon usually refers to the next 12 months – on global inflation, a weak shilling, and increased taxes before falling back to the target range.
Core inflation, which rose in the year ended July 2018, is “forecast to continue rising and peak in the range of 6-7% in the second half of FY 2018/19 but will stabilise around the medium-term target of 5% by end of 2019,” the monetary policy statement explaining Monday’s decision said. It’s rise will be determined by increases in fuel prices, economic output, and taxes.
Another upward nudge could come from the shilling’s exchange rate which the Banks said is vulnerable to domestic market conditions – like the speculative activity in the final quarter of FY 2017/18 which “resulted in the exchange rate overshooting its long-run equilbrium – and the possibility of tighter global conditions. A weaker shilling and higher fuel prices could see inflation rising above projections.
On economic growth, the Bank said its composite index of economic activity “projects robust growth in the first half of 2018, with annualised growth of about 6-6.5%”. It is expected to stay strong in the current financial year, averaging 6% compared to an estimated 5.8% in the previous financial year and 3.9% in 2016/17, supported by public infrastructure projects, recovery in foreign direct investment, higher agricultural productivity, and strong private sector credit growth.
BoU attributed the pickup in private sector credit to its monetary policy easing. “Indeed, weighted average lending rates fell to 17.7% in June 2018 from 25.2% in February 2016 when Bank of Uganda started easing monetary policy,” said the statement.
But it warned that government’s borrowing from local markets to finance public investments may crowd out private investment and consumption.