5 February 2013

Uganda: BOU Keeps Key Rate At 12 Percent

For the third month in a row, Bank of Uganda has maintained the Central Bank Rate at 12%, in yet another indication that the Central bank is not concerned about the prices of goods and services.

There were some positive prospects, with Governor Emmanuel Tumusiime-Mutebile saying the economic growth momentum had picked. The headline inflation has continued to fall from the 5.3% in the month of December to 4.9% for January 2013. The central bank says their priority is to hold the future average inflation at 5%.

Inflation declined largely as a result of food crop prices falling. However, Mutebile said there are high risks of inflation which include the commodity price shocks and exchange rate depreciations. Stephen Kaboyo, the managing director at Alpha Capital Partners, said BoU's decision points to caution.

"Maintaining the CBR at 12% is a prudent decision by BoU at this time. The move reveals that BoU is in a cautious mode, pleased to have navigated through the earlier turbulent period of volatility in exchange rate and high interest rates," he said.

Kaboyo added that BoU's monetary statement was also directed at confidence-building within the economy.

"BoU's approach, in my view, is to build the confidence gradually by applying more consistent and less risky monetary policy," he said.

However, there remain some concerns in regards to credit to the private sector, the engine of growth. Lending rates remain high. BoU Research Director Adam Mugume says a lot of patience is needed. "We expected them (banks) to react faster to the CBR, but it's impossible. They have to measure the risks involved first," he said.

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