The Bank of Uganda has maintained the Central Bank Rate (CBR), a benchmark lending rate for commercial banks at 6.5%. This was during the Monetary Policy Committee meeting of April 2022.
According to Deputy Governor, Michael Atingi-Ego, the economy continues to recover from the Covid-19 pandemic related downturn.
“Annual growth of the real gross domestic product (GDP) was estimated at 5.2% in quarter to December 2021 from 3.5% in quarter to September 2021. The full reopening of the economy and the diminished impact of the pandemic unlocked the factors that had held back economic activity. Nonetheless, there are indicators that the risk of weakening growth momentum due to adverse global factors that was flagged in February 2022 may have materialized. Consequently, economic growth is now projected in the range of 5.5% – 6.0% earlier projected. The most recent high-frequency economic indicators pointed to a weakening of the the domestic growth momentum in March 2022. The spike in global geopolitical tensions and supply chain disruptions are likely to hinder the stability and growth of the economy,” Atingi-Ego explained in a statement Tuesday.
The Central Bank says that inflation has remained below the medium-term (2-3 years ahead) target of 5% for five years to March 2022. However, the bank notes that inflation has risen in the last two months, with the annual headline and core inflation rising to 3.7% and 3.6% in March 2022 from 2.7% and 2.3%, respectively, in January 2022.
“This is mainly due to supply chain disruptions that have led to a spike in commodity and energy prices. Nevertheless, inflation remains below the target partly because the spike in prices of some commodities such as those of vegetables oil products carry a relatively smaller share of household budgets. Also, the strong shilling exchange rate helped to dampen prices pressure.
The inflationary developments have led to a revision of the outlook for inflation. Annual headline and core inflation is now forecast to average 5.2% and 4.7%, respectively, in 2022, from 4.5% and 3.9% as had been projected in February 2022 forecast round. In the medium-term, inflation is projected slightly above the target,” Atingi-Ego noted.
The considerable risks surrounding the outlook for inflation with the balance of risks tilted upwards. The risks include higher global commodity and energy prices due to worsening of the Russia-Ukraine conflict, heightened uncertainty in the financial markets due to the sanctions on Russia and anticipated tightening of monetary conditions by the central banks in Advanced economies to contain escalating inflation could drive financial flows from frontier markets like in Uganda to the safe-haven U.S dollar assets, thereby weakening the shilling exchange rate, bumper food crop harvests could lead to lower market prices and diminished domestic demand due to higher energy and commodity prices beyond general affordability among others.
Even though inflation is forecast slightly above 5% target in the medium term, Bank of Uganda says the initial impact of the recent price hikes has not spread across the basket of consumer goods and services. “In deed, the prices of some components of the consumer basket have fallen. As such, inflation expectations remain contained. Accordingly, the MPC judged that it was prudent to maintain the CBR at 6.5%, at this point. Similarly, the band on the CBR has been maintained at +/-2% points. Consequently, the margins on the rediscount and bank rates remain at 3 percentage points and 4 percentage points over the CBR, yielding redicsount and bank rates of 9.5% and 10.6%, respectively,” Atingi-Ego noted.
According to Atingi-Ego, the BoU will closely track inflationary developments and take appropriate pre-emptive action, where necessary, to ensure inflationary expectations remain contained around the medium-term target going forward; maintain the credit relief measures for the education and hospitality sectors which remained under lockdown for an extended period and further maintain the Covid-19 Liquidity Assistance Program (CLAP) to manage potential liquidity risks arising from the pandemic until the economic situation normalizes.
