Last month, the central bank raised its policy rate for the first time since April 2016 when it embarked on an easing cycle to stimulate the economy.
The Bank’s primary concern was inflation and, particularly, core inflation which it said would rise above its target if it maintained its monetary easing path. And in an indication of how much things have changed since 2016, BoU said strong growth that started in financial year 2017/18 could spur inflation this year due to the increased demand for goods and services.
The latest bank lending figures lend weight to the central bank’s decision. In September, the combined loans of all commercial banks grew at their fastest rate in 32 months, thanks to credit for the purchase of non-durable goods and services, livestock and crop production, and retail trade.
Bank lending increased by 12.2% from a year earlier to Shs13.2 trillion. The last time lending rose at a faster rate was in January 2016, when it increased by 13.5% year-on-year before declining in the months that followed and hitting negative territory that August and September.
The central bank first cut its key policy rate that April to stimulate economic activity by influencing banks to lower their lending rates. In subsequent meetings, it hewed closely to an accommodative monetary policy aimed at bringing down the cost of credit so the private sector could borrow and spend more.
Therefore, the recent change of direction, however modest, can be read as an indication that bank credit to the private sector is moving in the direction the Bank wants it to move, and that the economy is on stronger footing. The central bank says so too in the statement released to explain the decision.
“Economic growth has been solid since the second half of 2017 supported by the global economy upturn and the easing of domestic financial conditions,” the statement said. It added that the economy is expected to grow further supported by, among other factors, “robust domestic demand growth”.
The growth in bank loans in September was driven by an increase in loans for the purchase of non-durable goods (consumables) and services, which are classified under personal loans and household loans; they rose 28.3% from a year earlier and were 6.8% of total loans advanced.
Other significant contributors were loans for crops, livestock and poultry production which grew by 41.7% year-on-year and credit to the retail trade subsector, which increased by 21.2%. Loans to the two subsectors were 4.0% and 6.5% of total loans, respectively.
Shilling denominated loans increased by 18.3%, the same annual growth rate they posted in August, to Shs7.9 trillion. Foreign currency lending, on the other hand, rose 4.2% year on year to Shs5.2 trillion, up from 0.5% in August.
Growth in commercial bank lending is expected to improve further in the coming months as nonperforming loan ratios fall and the demand for credit increases, Bank of Uganda said in its State of the Economy report for September.
“Banks are expected to further ease overall credit standards as the asset quality continues to improve,” the report added. “This increase in credit growth, if sustained, is likely to boost private investment and consumption, which in turn should support growth.”
