Kampala, Uganda — On Dec.6, the Bank of Uganda (BoU) kept the central bank rate unchanged and promised to keep monitoring inflation and ensuring the overall health of the economy.
This marks the third consecutive time that the Monetary Policy Committee (MPC) of the central bank has maintained the primary interest rates at 9.5%.
This strategic decision follows a series of adjustments, including an increase from the historically low 6.5% in April 2022 to 10% in October of the same year, aiming to stimulate economic activities. This new development means that the bank's lending rates for loans and mortgages will remain at more than 20% per annum.
BoU said in a statement that the latest MPC considers the current monetary policy stance as able to contribute to keeping inflation around its medium-term target; supporting economic stability to encourage saving, investment, economic growth, competitiveness, and socioeconomic transformation.
BoU also said the near-term prospects for the economy broadly remain unchanged. The recent quarterly GDP estimates by the Uganda Bureau of Statistics (UBoS) indicate that quarter-on-quarter real GDP growth for the second quarter of 2023 stood at 5.2%, a much faster growth compared to 0.4% in the first quarter. The faster growth was due to a strong recovery in the services and industry sectors.
''Economic growth is projected to remain strong in the coming months due to continued recovery in services and industry sectors,'' said Deputy Governor, Michael Atingi-Ego.
''Economic activity will be boosted by investment in the extractive industries financed by foreign direct investment (FDI) and higher export earnings.''
He said economic growth is projected at around 6% in the Financial Year 2023/24 and in the range of 6% to 7% in the medium term.
However, this outlook is subject to a range of uncertainties, including slower global growth posing a risk to domestic growth, a resurgence of supply chain distortions due to geopolitical factors, and tighter fiscal policy in part due to unfavorable global financial markets that could restrict government development expenditure.
Other factors include a stronger moderation of household expenditure in part due to tight monetary policy conditions globally and a reduction in agricultural output due to bad weather.
Since the last Monetary Policy Committee in October, new data has shown that amidst a surge in fuel prices, inflation has continued to gradually slow down. Annual headline and core inflation dropped to 2.7% and 2.4% in September 2023 from 3.5% and 3.3% in August 2023, respectively.
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However, it remains unclear on whether it will continue to come down faster to the range of 3% to 4% in the fourth quarter of 2024 and back within the 4% to 5% range in 2025 as per the central bank's projection.
Latest statistics indicate that prices of food crops and related items in the concluding month of November 2023 decreased by 0.3%, according to the Uganda Bureau of Statistics (UBOS). This is a significant drop from the over 2% recorded the previous month. The statistics agency attributes this decline to a bumper harvest of vegetables, matooke, and others, which contributed to a 0.2% slowdown in prices during the month. Additionally, prices of fruits and nuts also saw a decrease.
But Atingi-Ego said projections are subject to risks. On the downside, he said global inflation could fall at a faster pace, potentially affecting domestic inflation.
''In addition, we could get a bumper harvest, which would push down food prices further leading to lower inflation,'' he said.
He added: On the upside, foreign exchange rate depreciation due to volatility in international financial markets, and escalation of the ongoing geopolitical conflicts could lead to further energy supply cuts and higher domestic fuel prices.''
Moreover, he said, prolonged higher inflation in advanced economies could lead to higher interest rates, triggering further capital outflows and spilling into further exchange rate depreciation. As a result, he said, MPC assesses the risks to be balanced in the short term but tilted upwards in the medium term.
