The Bank of Uganda’s monetary policy committee has voted to keep the Bank’s benchmark lending rate unchanged in its first meeting of 2019, noting that the risks to its medium-term inflationary outlook are roughly balanced.
The central bank rate was maintained at 10%, first set in October 2018 and maintained last December. Despite the rise in the annual headline and core inflation rates in January, the Bank said that inflationary pressures are restrained due to low food inflation, the decline in international oil prices, and a stable exchange rate.
Along with the move to keep the benchmark rate unchanged, the committee voted to maintain the rediscount rate and the bank rate at 14% and 15%, respectively.
Over the next two to three years, BoU projects that inflation will stay within its policy target of 5%. Its outlook for the next one year has also improved from December, driven by a stronger shilling and good crops harvests.
Additionally, the policymakers struck a very positive tone about the economy’s growth over the next few years. “The economy is projected to grow by about 6.3% in 2018/19 and remain on a steady growth trajectory over the coming years,” said the monetary policy statement that explains the committee’s decision.
The BoU added that its high frequency indicators show that economic growth continued expanding in the last half of 2018, supported in part by favourable financial conditions resulting from its expansionary policy, the stimulative effects of investments in public infrastructure, and an improvement in agricultural output.
However, that economic outlook will continue to depend significantly on weather conditions, the execution of public investments, and global economic conditions: agricultural production could be negatively impacted by the weather; the execution of public infrastructure projects could slow; and global trade frictions or a slowdown in global growth could lead to a slowdown in exports and fluctuations in foreign exchange rates.
Another concern is commercial bank lending to the private sector, which the Bank says is still lower than its historical trend even as it has improved since January 2018. “Its contribution to economic growth could be weighed down by the relatively weak performance of foreign currency-denominated loans,” the policymakers said.