Central Bank Chops Lending Rate to 15%, Projects Further Inflation

The Central Bank has effective Monday slashed the its lending rate by 1 percent from 16 percent predicting a worse core inflation for the rest of the year which peaked at 7 percent in May. The one percentage point reduction in CBR is expected to translate into cheaper and abundant liquidity triggering a deduction in interest rate.

The rediscount rate and the bank rate have been consequently reduced to 19 percent and 20 percent respectively.

Governor Bank of Uganda Prof. Emmanuel Tumusiime Mutebile while releasing the monetary policy statement for the month of June said that all sub components of inflation increased with exception of food crops and related items. The economic growth is however expected to drop to 4.6 from the earlier 5 percent projection.

Mutebile attributed the slow down to the adverse impact of the weak external economic environment, this site soft commodity prices, tight financial conditions and subdues domestic demand.

“Economic activity is expected to improve with domestic demand being the key contributor to economic growth amidst continued weakness in the external sector. BoU is cognizant of the fact that demand pressures on inflation remain subdued and indications are that domestic demand is likely to remain constrained this year,” the Governor told journalists at a news conference at BoU headquarters.

“Domestic pressures may increase further. And so inflation may edge up in the coming few months particulary the persistent non-food and services inflation.”

He says the combination of rising international oil prices and fuel tax increases in the new budget as well as worsening of food crops inflation contribute to the uncertainty of near term inflation.

Commenting on Uganda’s current balance of payments, the BoU Executive Director for Research Dr. Adam Mugume said exports performed relatively better over imports in 2015/16 financial year.

“Our exports experienced a 1.4 percent deduction to USD 2.2 Bn compared to imports which cost USD 3.9 Bn with a higher reduction (10.6 percent). The big reduction of imports is majorly due to an equal reduction in oil imports by 14 percent,” he said.

He also explained that BoU is confident about government’s commitment to reducing domestic borrowing from Ugshs 1.4 Tn to Ughs 6.2Bn as stated by Finance Minister last week. Dr. Mugume said; “This will stimulate private sector credit which is expected to grow on the range of 10 – 15 percent this financial year.”

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