The Bank of Uganda (BoU) Monetary Policy Committee (MPC) has raised the Central Bank Rate (CBR), a benchmark lending rate for commercial banks by 1 percentage point to 10 percent.
The Central Bank attributed the increase to the upward trajectory in inflation, with core inflation (excludes temporary price volatility as in the case of some commodities such as food items, energy products etc. It reflects the inflation trend in an economy) projected to rise above the target of 5 percent within the next 12 months.
Issuing the Monetary Policy Statement on Wednesday at BoU offices in Kampala, BoU Governor, Prof. Emmanuel Tumusiime-Mutebile, said in the recent months, rapidly rising oil prices coupled with a weaker Shilling exchange rate and indirect tax increases have pushed up inflation.
“The increase in core inflation was partly due to higher services prices, which rose sharply at the beginning of the financial year reflecting the effect of the Over-the-top (OTT) tax,” Mutebile said.
He said the strong rebound in economic growth in financial year (FY) 2017/18 has closed the negative output gap, and with growth projected to remain robust in FY2018/19, core inflation could rise higher in the remaining part of the fiscal year.
“Our forecasts indicate higher inflation compared to the August 2018 forecast round largely because the exchange rate is weaker and international oil prices are higher,” Mutebile said, adding that core inflation is projected to rise further in the coming months and peak in the range of 6.5-7.5 percent in the second half of 2019, thus warranting an increase in CBR.
“Core inflation is expected to fall back and stabilise at around 5 percent in the first half of 2020. The positive output gap will continue to be a key driver of inflation going forward,” he said.
He however said the economy is expected to remain on a steady growth part supported by robust domestic demand growth, public infrastructure investments, improving agricultural productivity, recovery in Foreign Direct Investment(FDI).
“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 stronger domestic demand,” he said.
The increase in CBR means that the already high interest rates charged by commercial banks are set to get higher, a thing that may result into slowed private sector credit growth and consequently, affect Uganda’s economic growth.