An announcement made by Uganda’s central bank on Thursday stated that the key policy rate remains unchanged at seven percent, a stance described by analysts as “cautious and guarded” amid a looming rise in inflation following the easing of lockdown restrictions.
With the resumption of schools, churches, airlines, and border points, business activity has slightly picked up, raising hopes for traders hard hit by the pandemic.
Following the lockdown easing and a stable exchange rate, the Bank of Uganda (BoU) noted a slight improvement in both foreign and domestic demand, leading to recovery in economic growth. However, the regulator warned that inflation would remain above its five percent target until about 2022.
Annual headline inflation slightly declined from 4.6 percent in August 2020 to 4.5 percent in September 2020, while core inflation rose from 5.9 percent to 6.2 percent during the same period according to government data.
BoU in a statement noted that the lack of evident pressure on demand, cost-push pressures emanating from higher taxes on imported consumer and intermediate products as well as social distancing measures could cause inflation to edge up further in the coming months.
“Price pressures could increase due to the further easing of lockdown measures as households increase spending on items that they had been forced to defer, e.g. expenditure on school fees,” the regulator added. “These pressures could also increase due to higher production costs from persistent supply disruptions.”
Benoni Okwenje, the General Manager for Treasury Operations at Centenary Bank Limited says support from BoU would enable commercial banks to focus on strengthening capital levels during the loan restructuring window that has added some pressure on banks’ cash flows but may not boost their lending capacity or appetite.