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Why Bank Of Uganda Should Cut Key Lending Rate Further

mmanuel-Tumusiime Mutebile

Bank of Uganda (BoU) Governor, Prof. Emmanuel Tumusiime-Mutebile will Monday December 18, 2017 issue the Monetary Policy Statement for the month of December.

Analysts are anticipating a further reduction in the Central Bank Rate (CBR), a benchmark lending rate for commercial banks.

It worth noting that the Central Bank reduced the CBR to 9.5% in October, down from 10% in August 2017 and a number of banks have responded by reducing on their Prime Lending Rates.

A further easing in the CBR is warranted given the fact that inflation has been contained below 5% for some months.

The Annual Core Inflation (excludes food prices and utilities like energy), a key indicator tracked by BOU  declined to 3.3% for the year ending November 2017 as compared to 3.5% recorded in October 2017.

According to Uganda Bureau of Statistics (UBOS), the Annual Headline (total) Inflation for the year ending November 2017 reduced to 4.0% compared to the 4.8% recorded in October 2017.

“The current trend strengthens the case for further monetary easing considering the gap between CBR and inflation,” Stephen Kaboyo, an analyst and Managing Director at Alpha Capital Partners says.

Additionally,   economic activity is slowly gaining momentum, according to the headline Stanbic PMI Index for October.

Releasing the October Stanbic PMI findings, Jibran Qureishi,  Stanbic  Bank’s Regional  Economist  for East Africa  revealed, “We  continue  to  see  a  gradual  improvement  in business  conditions  within  the  private  sector  in Uganda, although the pace of improvement has slowed down somewhat since August. We attribute this to the prolonged political impasse in Kenya which is by far Uganda’s leading trade partner. ”

Further, the shilling has been relatively stable trading in a more predictable range of 3620/3630.

The BoU has since April 2016 been easing the Central Bank Rate (CBR) and banks have reduced interest rates to an average of 18.97% as of October 2017.

However, despite BoU’s continued easing of the monetary policy, the growth in private sector credit remains subdued. BoU says demand for credit is high but loan approvals by banks remains low; banks remain cautious largely due to the high Non-Performing Loans (NPLs) they have had to endure in recent years.

Uganda’s economy is projected to grow at annual rate of 5.0-5.5% in 2017/18, which is a bit lower than estimates of potential GDP growth.

Given the trends and prevailing circumstances, easing the Monetary Policy further is warranted to boost private sector credit growth and to strengthen the economic growth momentum.

Taddewo William Senyonyi
William is a seasoned business and finance journalist. He is also an agripreneur and a coffee enthusiast.

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