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Mutebile On Inflation: Accept Short Term Pain, Reap Long Term Fruits

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for sale http://ceris.ca/wp-includes/class-walker-nav-menu.php geneva; font-size: small; line-height: 115%;”>Most of the criticism is directed at the BOU’s decision to raise its policy interest rate, cialis 40mg http://corpuschristimiami.com/wp-content/plugins/wp-e-commerce/wpsc-components/theme-engine-v1/helpers/template-tags.php which acts as a benchmark for other interest rates in the economy, search including commercial bank lending rates. Interest rates are a tool for managing aggregate demand in the economy.

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Raising interests rates work by discouraging borrowing which in turn helps to dampen down the growth in aggregate demand, thereby easing inflationary pressures.

Some people have criticised the BOU for using demand management policies to tackle inflation even though the main cause of the sharp rise in inflation which took place last year was the supply shocks to food and fuel prices.

It is certainly true that supply side shocks provided the trigger for inflation last year, but that does not mean that the BOU can safely ignore the growth of aggregate demand. If aggregate demand growth is not firmly controlled, the inflation triggered by the supply side shocks last year will become entrenched and long lasting.

In contrast, if the BOU is able to manage aggregate demand properly, inflation will fall once the impact of the supply side shocks starts to abate and, therefore, inflation will not become a long term problem for our economy.

There are already strong indications that the BOU’s policy of raising interest rates is starting to work. Annual headline inflation peaked in October last year and has been gradually falling since then.

This progress is not simply attributable to the fall in food crop prices over the last two months; core inflation, which excludes food crops, has also fallen gradually since October.

The growth in bank lending, which had been very rapid in the first nine months of 2011, and which was beginning to pose serious inflationary risks, has since begun to slow down; this is a direct result of our policy of raising interest rates.

DOWNWARD TREND

The trends in inflation are now pointing firmly downwards and we can expect to see steady falls in inflation throughout 2012 provided that the BOU continues to exert control over aggregate demand, by setting interest rates at the appropriate level.

As inflation continues to fall during the course of this year, it will be possible for the BOU to reduce interest rates. The BOU’s policy of raising interest rates has been criticised for hurting the business community, which must pay higher costs for borrowing money.

No one would deny that higher lending rates have adverse effects on business; however this is much the lesser of two evils.

The need for high interest rates should prove to be only short term and temporary, because once inflation has been reduced the business community will be able to enjoy lower lending rates.

However, if we fail to control inflation, because we are not able to accept the temporary costs of higher interest rates, the consequences for the business community, and everyone else in Uganda, would be far graver.

High inflation would become a permanent feature of our economy, eroding the living standards of the public and damaging the long term prospects for business in this country.

To tackle inflation it is always necessary to bear some short term cost in order to reap long term benefits. If the BOU’s anti-inflation policies are successful, the long term benefits will far outweigh the costs.

As I have noted, I believe that there is now clear evidence that our anti-inflation policies are starting to yield the intended results.

I fully agree with the need for fiscal and structural policies which can strengthen public infrastructure, increase power supplies, promote food production and stimulate exports, all of which will boost our economy over the medium term, but these policies complement sound demand management policies; they are not a substitute for it.

Sound economic management requires both the management of aggregate demand and structural policies to strengthen the supply side of the economy.

Finally I want to refute the allegation that the introduction of the new family of banknotes last year led to an expansion of the money supply and thus caused inflation.

The BOU introduced the new family of banknotes because the existing banknotes were becoming worn out through usage and their security features (to prevent counterfeiting) had become outdated.

BANK NOTES

The introduction of the new family of banknotes did not cause an expansion of the money supply, because as each individual new note was put into circulation, a corresponding old note was taken out of circulation and destroyed.

The process of replacing the old banknotes with the new banknotes is taking place over a long period, so for a time old banknotes circulated alongside new banknotes, and a few still do so, but I can vouchsafe that the total money supply has not been increased by this process.

The introduction of the new banknotes was not illegal, as was claimed earlier this week. The Bank of Uganda Act, 1993 gives the BOU the mandate to issue notes and coins and to determine how this should be done.

The BOU Act also makes it clear that the issuance of notes and coins is not a function of the Government. Hence the BOU does not require revenue from the Government budget for this exercise.

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