The Bank of Uganda (BoU) has held its benchmark lending rate at 12% for a second straight month and expects continued cuts in commercial bank rates despite marginal increases in annual headline inflation.
Economic growth hit 5.2% at the end of the year 2012 outperforming projections of 4% due to seven straight reductions in the Central Bank Rate (CBR) and modest commercial bank rate reductions.
"The Bank considers the current stance of monetary policy to be accommodative and supportive of the economic growth as well as anchoring inflation expectations around the medium-term target," Justine Bagyenda, the acting deputy Governor said.
"Given the lag in the monetary policy transmission mechanism, I expect a further reduction in lending rates," she added.
Bagyenda made the comments at the release of the January monetary policy statement at the Bank of Uganda headquarters in Kampala.
Annual inflation climbed to 5.5% from 4.9% in December due to the two week holiday. However, the Central Bank maintains that subsequent figures will show a decline and that present rates are within the 5% target.
The Central Bank has dropped the benchmark Central Bank Rate by 11 percentage points since the rate peaked in 2011, in direct contrast commercial bank rates have only gone down by 4 percentage points in the same period. Commercial bank lending rates currently average 21.67% with Citi Bank and Barclays having the lowest prime rates at 19.3% and 19.8% respectively, further rate cuts are expected.
The Central Bank noted that lending to the private sector continues to be dismal, undermining economic growth. Adam Mugume, the BoU executive director for research pointed out that the gap between exports of $240m (sh648b) and imports of $439m (sh1.2 trillion) in November has continued to grow, weakening the shilling.
"The situation in South Sudan, our top export destination, affected the shilling; however, we expect exports to the country to pick up when normal oil exports resume," he said.
The Central Bank recently intervened to stabilise the shilling after it hit sh2,694/2,704 buying and selling respectively, the shilling is now trading at sh2,692/2,702 against the dollar. Stephen Kaboyo of Alpha Capital Partners notes that continued demand for the dollar by corporates and low supply will continue to exert depreciation pressure on the shilling.
"Depreciation pressures are expected to continue building up as the market projects strong demand as corporates return," he noted. Mugume noted that the economic recession in Europe has ended and that exports to Europe are likely to pick up
to improve the value of the shilling and economic growth prospects.
"We received over $100m in remittances in the month of November and an average of $80m for the other months. A withdrawal of $200m in aid by donors is not as bad as has been reported," he said. "We expect the later part of the year 2013 to be better than the beginning."