Sensing a gradual decline in the prices of goods and services, and the need to encourage borrowing, Bank of Uganda yesterday reduced its Central Bank Rate to 19% for the month of July.
The one percentage point decline from June's 20% rate is still higher than the 13% rate that Bank of Uganda started with when it introduced this policy of setting central bank rates exactly one year ago. Headline inflation - the measure of the change in the overall prices of goods and services - dropped to 18% in June from 18.6% in May.
According to Bank of Uganda, the drop in food crop prices appears to have pushed headline inflation further down. The Central Bank's monetary statement notes that the rainy season has supported the drop in food crop prices, and the trend is likely to continue for the next two months. Core inflation - the measure of the change in the prices of goods and services excluding food, energy, and other utilities - slipped to 19.5% in June from 21.2% in May.
Bank of Uganda predicts that inflation is likely to drop further in the next three months, but maintains that there are some threats to this decline. Louis Kasekende, the Deputy Governor, in his monetary policy statement, notes that a weak shilling largely brought about by Ugandans' insatiable appetite to consume imports, as this creates a higher demand for the dollar, is likely to slow down the decline in inflation.
Throughout this week, Standard Chartered bank's Denis Mashanyu expects the shilling to trade around the Shs 2,465-85 range to the dollar in what is expected to be a largely quiet week. The drop in the Central Bank Rate is expected to motivate commercial banks to reduce their lending rates too, and encourage the public to borrow.
The low demand for loans as businesses hold back any expansion plans until credit is affordable has hurt the country's Gross Domestic Product. The country's GDP growth is estimated at about 3.2%, the lowest in more than 20 years. Bank of Uganda remains confident that inflation will drop to single digit before the end of the year.