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Central Bank Further Eases With Slight Reduction in Lending Rate

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Bank of Uganda has announced a slight reduction in its prime lending rate
Bank of Uganda has announced a slight reduction in its prime lending rate

    By: Paul Ampurire

  • Feb 15,2017
  • 484 Viewed

The Central Bank has Wednesday reduced its prime lending rate by 0.5 percentage points to 11.5% in a move to support economic activity amid a slow down in Uganda’s economic growth.

Bank of Uganda has been easing in its CBR since April in 2016 in anticipation that this could influence a reduction in commercial bank lending rates which have lowered to 22.7%

Central Bank predicts that inflation will increase in the short term due to the increase in international oil prices and persistent drought which has made food prices to rise.

It further indicates that GDP growth for 2016/17 has been revised downwards to 4.5% from the earlier projected 5% resulting from a mixture of domestic and external factors.

“Bank of Uganda judges that a further cautious easing of monetary policy is warranted to support economic activity,” Emmanuel Tumusiime Mutebile the Governor Bank of Uganda announced on Wednesday. He was releasing the monetary policy statement for the month of February.

He said the easing will be consistent with achieving the annual core inflation target of 5% over the medium term. With the slight cut in the CBR, the rediscount rate and the bank rate have also been reduced to 15.5% and 16.5% respectively.

In its monetary policy for February, BOU remains ‘optimistic’ that the economy will grow at 5.5% in 2017/18 “driven by improved public infrastructure investment, a recovery in private sector investment and improvements in agricultural production and consumption”.

Mutebile said; “We can predict confidently that growth will return to normal with the weather expected to normalize in March this year.”

But some economists feel that easing by the central bank still hasn’t translated into growth in the private sector borrowing patterns. Most players in the private sector fault the fiscal side for crowding the financial sector, inefficiency in spending and investing in heavy infrastructure projects that increase the risk of indebtedness.

Dr. Adam Mugume the Executive Director for Research at BOU however maintains that “the economy is not in a crisis” and that the consistent easing in monetary policy has had some “positive developments”.

“The reason why we reduced the CBR by only 0.5 percentage points is because we anticipate recovery in activity. Since we started easing in April 2016, private credit contracted by 0.2% in September the same year,” he told the press.

He said lending interest rates for commercial banks have reduced by 2.5 percentage points to 22.7%.

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