The Bank of Uganda has decided to raise the Central Bank Rate by a percentage point to 8.5 percent as part of emergency measures against the spiraling inflation.
The Central Bank Deputy Governor, Michael Atingi-Ego called an emergency Monetary Policy Committee meeting to respond to the situation that has seen prices of most essential consumer items rise sharply over the last three months.
The Committee does not usually sit after every two months and the last meeting was in June, to determine the direction of the cost of money for the next two months.
However, following the rise in headline inflation from 6.3 percent at the end of May to 6.8 percent at the end of June, the Bank decided to take further action to control the trend.
By raising the CBR, it is expected that commercial banks will find the cost of money higher and raise interest rates, forcing the demand for credit to fall.
There is likely to be more demand by banks for government treasuries because of the expected higher returns, and this will further reduce the money in circulation.
This, it is expected, will in turn lead to lower demand for some goods and services, especially luxuries, and lead to lowering in prices, according to Dr Atingi-Ego.
However, this also comes at a time when most people are adjusting their spending partners by reducing or suspending spending on some goods and services not considered so essential, as the rising cost of living dictates.
The government has resisted all pressure to intervene directly in the rising prices, saying it will not be tenable since the situation is determined by external forces.
The high inflation has largely been influenced by “external cost pressure arising from higher global food and energy prices, persisting global production and distribution challenges, as well as rising domestic food crop prices due to dry weather across the country,” according to BOU.
Executive Director of Research at the BoU, Dr Adam Mugume says according to their survey, there is a decline in demand by both households and businesses.
The bank says that this situation is made worse by a weak Ugandan shilling that has increased the risk of higher inflation which may go to 7.4 percent over the rest of the year and into next year, according to the bank forecast.
The Bank of Uganda has in recent months intensified its participation in the financial market by buying out excess currency to tame the exchange rate and strengthen the shilling, as well as selling treasury bills and bonds to control the amount of money in circulation.
The shilling continued to gain ground on Tuesday and closed the day selling at 3720 to a dollar, from the opening rate of 3745, driven by interbank sellers and low activity on the demand side.
–URN
