The Bank of Uganda on Thursday held its benchmark interest rate yet again in an effort to keep inflation down and below target, and to support economic growth.
The central bank rate (CBR) was kept unchanged at 9%, initially set in October last year and maintained in December. The band on the CBR was maintained at +/-3 percentage points while the rediscount rate and the bank rate remained at 13% and 14% respectively.
“The evaluation of the macroeconomic developments and outlook based on the available information set suggests that, at the current CBR, the monetary policy stance is accommodative and that inflation will converge to target in the medium term while supporting economic growth,” said the monetary policy statement explaining the decision.
The bank said that Uganda’s economy is expected to expand at between 5.5 and 6% in the 2019 fiscal year, which runs to June 2020, accelerating to an average of 6.3% in the medium term. But this is below its’ estimate of 6.5%, the highest level of growth BoU thinks the economy can sustain in that period.
“The economic growth is weighed down by weak growth in exports,” the statement said. “Moreover, domestic public sector financing continues to grow, increasing risk premiums and pushing borrowing costs for the broader economy higher despite the accommodative monetary policy stance.”
The coronavirus outbreak in China has also lowered the near-term economic growth outlook, and will have a large downward effect on global economic activity than current estimates show if it persists for an extended period, according to the bank. It also mentioned as risks the trade dispute between the United States of America and China and the “recent escalation of geopolitical tensions in the Middle East.”
Domestic pressures include “constraints to agricultural production including uncertain weather patterns and the current invasion by desert locusts.” And while the economic impact arising from supply chain disruptions caused by the coronavirus outbreak in China “will be of a short duration, some sectors could be significantly affected,” Bank of Uganda said.
On inflation, BoU said its “appropriate monetary policy stance” had kept it at an average of 3% in the three years to January 2020. The latest update from the Uganda Bureau of Statistics indicates that inflation remains subdued, while the bank’s outlook is that inflation will stay within the medium-term target of 5%.
“The BoU assesses that risks to the projected path for inflation are fairly balanced,” the statement said. “Demand-side pressures remain subdued. Global inflation is projected to remain low. Food price inflation remains modest although unpredictable weather patterns and the desert locust invasion create some caution about the trajectory of future food crop prices.”
The statement adds: “While the shilling has remained stable with a bias towards appreciation since January 2019, the risk remains that domestic and external shocks could generate capital flow volatility and put pressure on the exchange rate and inflation.”