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Uganda: BOU Moves to Control Rising Inflation Rate
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The Monitor (Kampala)
23 July 2008
Posted to the web 23 July 2008
Martin Luther Oketch
Kampala
As inflation continues to be a big issue of policy concern, Bank of Uganda has introduced new monetary policy tool to control inflation that has more than doubled the government target of controlling it at 5 per cent.
The new Deposit Auction Instrument targets the excess reserves of the commercial banks only. This means that it will be the central bank borrowing from the commercial banks unlike in the past when the Central Bank was the lender of the last resort to commercial banks.
Central Bank officials say that all commercial banks can bid directly to Bank of Uganda and no collateral is given by BoU in exchange for deposits.
High inflation is a rising national and global concern, implying the need for more assertive monetary policy responses in certain parts of the world including Uganda.
At the international level multilateral institutional stress that in many emerging economies, monetary policy needs to be tightened appreciably, combined with fiscal restraint and, in some cases, more flexible exchange rate management in order to reverse the recent buildup in inflation.
In a technical meeting convened by Bank of Uganda on operational modalities for the instrument at Imperial Royal Hotel on July 18, Deputy Director Financial Markets Department Bank of Uganda, Mr Stephen Mr Kaboyo said that the new monetary policy that has been on added to the already existing monetary policy targets only the commercial banks.
"The main objective of this additional monetary policy tools is to control the rate of inflation in the country that has been rising of late," he said.
Mr Kaboyo said that the new monetary policy tool targets the excess reserves in commercial banks that are at times beyond stipulated requirements by the central bank, which at times leads to excess liquidity supply in the market.
One specific feature in the new monetary policy is that deposit auction will only be conducted at a description meaning that there is no fixed time table for it.
Mr Kaboyo said that a commercial bank will required to deposit Shs100 million with Bank of Uganda and held by BoU for a fixed term short tenors ranging from overnight to one month and at a fixed rate interest.
Interest rate implied is a simple interest rate with the day- count convention "actual/365-day". Interest is paid at maturity of the deposit. Interest income from deposit is 100 per cent exempted from withholding tax, while deposit must be held to maturity.
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Mr Kaboyo said that Bank of Uganda implements monetary policy control through a mix of monetary policy instruments. Uganda's current inflation rate stands at over 12 per cent and this has mainly been attributed to spiraling fuel and food prices.
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