Bank of Uganda (BoU) has announced a decision to maintain its Central Bank Rate (CBR) at 10.25% as part of its ongoing efforts to combat inflationary pressures.
This decision was made by the BoU’s Monetary Policy Committee (MPC) and reflects a strategic move to stabilize the country’s economic environment amidst persistent inflation risks.
According to Deputy Governor Dr. Michael Atingi-Ego, the MPC's decision was influenced by recent economic data indicating a slight decrease in headline inflation from 3.4% in February to 3.3% in March 2024, primarily driven by reduced food crop inflation.
However, core inflation remained steady at 3.4%, with a marginal increase in services inflation from 5.4% to 5.5%
The Bank of Uganda's monetary policy aims to anchor inflation around the medium-term target of 5%, which is essential for Uganda's socio-economic stability and growth. Despite the recent stability, the MPC highlighted significant upside risks to the inflation outlook.
These risks include geo-political tensions, potential energy price hikes, tighter global financial conditions, and domestic factors such as unfavorable weather patterns affecting food supply
One of the key reasons for maintaining the Central Bank Rate at 10.25% is to manage the exchange rate of the Ugandan shilling. The shilling has experienced some stabilization due to the recent rate adjustments but remains vulnerable to external pressures, such as the outflow of short-term foreign investor funds and strong domestic demand by corporates.
Atingi-Ego noted that a weaker shilling could lead to higher domestic prices, further fueling inflation.
The decision to keep the Central Bank Rate at its current level also considers the broader economic context. While Uganda's economy shows resilience, recent indicators suggest a potential slowdown in near-term growth. Factors contributing to this include global economic uncertainties, the depreciation of the shilling, and tight domestic financial conditions, which could dampen domestic demand.
Economic growth for the fiscal year 2023/2024 is projected at approximately 6%, with subsequent years expected to see growth between 5.5% and 6.5%
Maintaining the Central Bank Rate at 10.25% also aims to mitigate the potential adverse effects of inflation on household incomes and consumer spending. High raw material import costs could constrain investment expenditures, and potential shortfalls in tax revenue might necessitate tax hikes or increased domestic financing, potentially crowding out private sector credit growth.
BoU's decision reflects a careful balancing act between containing inflation and supporting sustainable economic growth. The MPC remains vigilant and prepared to respond to any materialization of the identified risks, ensuring that monetary policy remains aligned with Uganda’s economic stability goals.
