case http://coloradofinearts.org/wp-includes/post.php "sans-serif";”>Mutebile says the momentum of disinflation has strengthened in August 2012.
He said the annual headline and core inflation fell sharply to 11.9 percent and 11.5 percent respectively in August from 14.3 percent and 15.4 percent in July.
The Governor maintained the Central Bank will reduce its policy interest rate-the Central Bank Rate (CBR) – by two percentage points to 15.0 percent for September 2012.
This reduction in the CBR is intended to bring about a further fall in the marginal cost of funds for the commercial Banks and hence a fall in bank lending rates to stimulate a recovery in bank lending to the private sector.
He said since the beginning of this year, monthly inflation rates have been very subdued, with the headline and core inflation rates averaging 0.4 percent and 0.3 percent respectively, which is an indication that the disinflation process has remained solid.
The main reasons given for the decline of inflation are a reduction in the food prices, weakening of the domestic demand pressures, with the economy operating below potential output levels and then stability in the nominal exchange rates since the start of the second quarter of 2011/12.
The BOU expects the annual core inflation to fall to single digits by the end of September 2012 and then gradually flatten out at around 5 percent in the first half of 2013.
He, however, said there are potential risks of stronger inflationary pressures emanating from food price shocks as we move into 2013 because of drought in major food producing regions.
And also pressures from the external sector given Uganda’s large current account deficit.
“The band on the CBR will remain at +/-3 percentage points and the margin on the Rediscount Rate will remain at 4 percentage points on the CBR. The Rediscount Rate and the Bank rate will now be set at 19.0 percent and 20.0 percent respectively in September 2012,” said Mutebile.
With the sharp drop in the lending rate, commercial banks are hugely expected to lower their interest rates to encourage borrowing and growth of the banking sector.
8:00am: The Bank of Uganda (BoU) governor Professor Emmanuel Tumusiime-Mutebile will on Tuesday issue the policy interest rate – the Central Bank Rate (CBR) for the month of September.
The Central Bank last month reduced the Commercial banks‘ lending rate by 2.0 percentage points to 17 percent.
“The reduction in the CBR in August will bring about a further fall in interbank interest rates and thus the marginal cost of funds for the Commercial Banks,” the Governor said then.
“In the last two months, 7 day interbank interest rates have tracked the CBR quite closely on average. The reduction in the CBR in August will bring about a further fall in interbank interest rates and thus the marginal cost of funds for the commercial banks,” he noted.
Mutebile said the BoU expected that the fall in the cost of funds would induce Commercial Banks to lower their lending rates, which was necessary to stimulate a recovery in private sector credit.
According to the governor, annual core inflation was expected to fall to single digits by the end of the third quarter of the calendar year and then to around 5 percent in the first half of 2013.
“The main upside risk to the inflation forecast is posed by potential volatility in the exchange rate. To mitigate this risk, the BoU will take decisive actions to avert any instability in the exchange rate,” he concluded.