Experts have welcomed the decision to keep the Central Bank Rate at 12%, for the third month in a row, even as Kenya - Uganda's main trading partner - went through a tense electoral period.
"Although we had thought there was some risk of a modest late easing in the cycle, in view of the overall outlook, this is not entirely surprising, and the [Bank of Uganda] is correct to focus on the outlook for inflation, rather than past inflation in formulating its decision," said Razia Khan, the Head of Research, Standard Chartered bank, Africa Division.
Stephen Kaboyo, the managing director at Alpha Capital Partners, says Bank of Uganda is cautious in the way it is doing things. "A cut in CBR at the present time would not support the shilling. It would potentially undo what has been achieved by building up inflationary pressures yet again as the fragile recovery takes shape," he said.
BoU officials said their decision to keep the CBR, a key monetary tool that tries to influence the price of credit in the market, was driven largely by a drop in inflation, especially the decline in food prices. Headline inflation, which measures the overall change in the prices of goods and services, slumped to 3.4% in February from 4.9% in January.
Core inflation, the change in the prices of goods and services minus food, energy, and utilities, eased marginally to 5.5% in February from 5.6% in January. Both are within Bank of Uganda's target of 5%. Presenting the monetary statement for March, Deputy Governor Louis Kasekende said local developments and not events in Kenya influenced their decision.
"Kenya's elections did not influence us in setting the CBR. We focused on domestic developments," Kasekende said.
Domestic developments show that Uganda's economy is turning out to be robust. BoU says the annual growth in monetary aggregates continues to recover, albeit at a modest rate. The bank also says real Gross Domestic Product, a key indicator of the performance of the economy, is expected to gradually recover in the months ahead, and that a couple of signs point to "increased buoyancy in the economy."
Yet things would have been better if the banks had reduced their lending rates to a level that would boost private sector credit. At the moment, the biggest chunk of credit towards businesses is in the form of the cheaper foreign-denominated loans. However, although BoU Governor Emmanuel Tumusiime-Mutebile has been critical of the banks, Kasekende appeared somewhat empathetic.
"Commercial banks might not reduce at the same rate as the CBR, but I don't want to say they have refused," he said. "We don't want to tell banks to set their prime lending rates at 12% and then see commercial banks failing. They have costs."