The Bank of Uganda has today announced a raise in the central bank rate (CBR) from 9% to 10%, a move responding to pressure of increasing prices of goods and services.
The CBR is key in determining the interest rates but also shows whether the economy is doing well or not. A raise means BOU is sensing the economy could hit some turbulence going forward. The central bank uses this rate to control inflation as well.
Over the past one year, BOU has reduced it from the highs of 17% early last year to 9% in June this year to boost growth by allowing businesses to borrow at lower interest rates and invest. The lower the CBR, the lower interest rates are likely to be.
BOU governor Emmanuel Tumusiime-Mutebile told reporters today afternoon that inflation is projected to rise above the 5% target within the next 12 months – necessitating policy stance change. Core inflation, targeted by BOU and which measures change in prices of goods and services less water, electricity and food, increased to 3.9% last month.
“In the recent months, rapidly rising oil prices coupled with weaker shilling exchange rate and indirect tax increases have pushed up inflation,” Mutebile said while reading October monetary policy statement at BOU offices in Kampala.
Oil prices have edge up to a four-year high of $80 per barrel in the global market. At the pump level in Uganda, a litre of petrol is at Shs 4,300 from Shs 3,800 in January. Diesel is selling at Shs 4,000. Fuel has an impact on almost everything sold on the market.
Raising the key rate may see a reversal in the commercial bank interest rates that had started dropping and this may slow down borrowing and consequently investment. The raise also means those servicing bank loans may also end up paying back more.
BOU said higher prices in the market have been pushed up by weaker shilling. It means importers need a lot money to buy dollars to import the same amount of goods they imported cheaply - say in January this year – consequently, selling them expensively.
“A key risk to the inflation outlook is the shilling exchange rate which remains vulnerable to the possibility of tighter global financial conditions as well as strong domestic demand,” Mutebile said.
The shillings weakness can also be attributed to the fact that Uganda exports less than it gets from the outside. This means the country spends more dollars than it is able to earn affecting its currency.
A 2017/18 financial report by BOU shows that the shilling was generally stable for most of the financial year but later lost ground.
“During the last quarter [April–June], the shilling weakened, largely on account of global strengthening of the dollar and elevated US dollar from oil, manufacturing and telecommunications sector as well as offshore investors amidst low inflows from exports,” BOU report says.
The governor said, however, the economic growth prospects in the next two to three years remain unchanged. This, he indicated, means that the central bank thinks the economy will still be on the upward trend – at least above six per cent.
“Economic growth has been sold since the second half of 2017 supported by the global economy recovery and the easing of domestic financial services,” Mutebile said.