On Feb.13, Bank of Uganda announced a cut in the Central Bank Rate by 0.5 percentage points to 9% in the next three months as a measure for boosting private sector credit uptake and economic activities.
The Governor, Emmanuel Tumusiime Mutebile, said the decline in headline inflation and core inflation from 3.3% and 3% last December to 3% and 2.6% in January 2018 respectively triggered the lowering of the policy rate.
The CBR is used as part of monetary policy instruments to give direction to commercial bank lending rates for a particular period of time.
"Given the objective of keeping inflation close to the target and the estimated spare capacity in the economy, a cautious easing of monetary policy is warranted to further boost private sector credit growth and to strengthen the economic growth momentum," Mutebile said.
The 9% rate is the lowest since 2011 when Inflation Targeting Lite (ITL) was introduced to tame inflation that had jumped to 30%, the highest since 1993. The highest point, the CBR has been was 23% at the end of 2011.
Meanwhile, Mutebile said there are indications of a revival in private investment activity reflected in the recovery of foreign direct investment, which grew by 18.5 % in 2017 compared to a decline of 30.5% in 2016; improvement in shilling credit extension recorded at 10.8% in December 2017 compared to 7.9% in December 2016; and increased imports of raw materials and capital goods, which grew by 17.4% compared to a decline of 21.1% in the period under review.
He said economic growth for FY2017/18 is projected to be in the range of 5.0-5.5%, signalling a positive payoff for the current stimulatory monetary policy. Many banks have recently announced reductions in interest rates with the average lending rate now quoted as 20%.