Photograph — Discover Africa Safaris

For the first time since October 2018, Uganda’s central bank has lowered its monetary policy rate to nine percent. This represents a reduction of 100 basis points from the previous rate of 10 percent.

The sharp rate cut was implemented at a policy meeting on Monday, October 7. Similar to the reduced Central Bank Rate (CBR), the rediscount rate has been lowered to 13 percent, and the bank rate to 14 percent.

The apex bank in the statement said that the move was aimed at speeding up a subdued economic growth. “The economy continues to grow but at a slowing rate,” the bank said, pointing to the gross domestic product (GDP) which slowed in the first half of 2019 compared to the second half of last year.

Uganda’s GDP eased to annual growth of 5.4 percent in the second quarter of this year from 5.6 percent in the first quarter and in August Bank of Uganda (BoU) Governor Emmanuel Tumusiime-Mutebile had forecast growth in 2019/20 of 6.0 to 6.3 percent.

The Composite Index of Economic Activity (CIEA) also points to moderate economic activity in the first quarter of the current 2019/20 financial year, which began on July 1.

“The outlook is uncertain, particularly as a result of the unfavourable global economy,” BoU said, adding that a combination of widening fiscal and current account deficits as well as public sector financing needs could put more pressure on lending rates, leading to a further decline in economic growth.

Consequently, the regulator reduced the main rate to spur growth in GDP and the economy. “The economy still has spare capacity and lower interest rates will help reduce output gap,” Tumusiime-Mutebile added.

Benign inflation forecast

A lowered forecast for inflation also provided room for the policy loosening move, the governor added. Tumusiime-Mutebile said the BoU “believes that the benign inflation outlook provides room for a reduction in the policy rate to support economic growth.”

Over the past three months, Uganda’s inflation has been slowing down due to lower food prices, a stronger local currency and moderating consumer demand. Headline inflation declined to 1.9 percent in September from 2.1 percent in August while core inflation fell from 4.9 percent in June to 2.5 percent last month.

The BoU lowered its forecast for core inflation to remain below its 5.0 percent target until the fourth quarter of 2020. The revision follows Tumusiime-Mutebile’s forecast in August that core inflation would edge up and peak in the fourth quarter of 2020 at about 6.5 percent.

Spurring economic growth in Uganda

Generally, monetary policy easing in economic management signals government intention of stimulating growth by making credit more affordable. As indicated in the slowing economic activity, lending to the private sector in Uganda is still below the peak of 20 percent recorded in 2009 and 2011.

A reduction in the key policy rate usually leads to declines in benchmark interest rates incurred by banks seeking short term funds for their operations. The reduced funding costs for banks, in turn, yield discounted borrowing rates charged, unlocking more lending for the private sector.

The policy loosening by the apex bank is expected to come as a relief to businesses that are cash-strapped in funding their operations or expansion, thereby fueling economic activity. “This policy move is expected to… accelerate credit growth and real economic activity,” said Dr Adam Mugume, Executive Director for Research BoU.

At the consumer level, the issue of subdued domestic demand – which leads to low sales for businesses – could also witness a turnaround. This is because the CBR cut would propel higher consumer lending and ultimately increased household spending.

While the latest move by BoU is definitely a catalyst for economic growth, it comes with downside risks, as every other policy does. In this case, offshore investors may be discouraged by the lowered interest rates, leading to capital flight and the depreciation of Ugandan shilling against the U.S. dollar.

Those concerns were brushed off by Mugume. “We do not expect the rate cut to affect the exchange rate negatively due to offshore investor actions. Besides, the yields on Uganda government debt remain more attractive compared to other African markets except for Nigeria and Ghana that also bear some currency risks,” the BoU director explained.


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