The Central Bank of Uganda has made a significant move by reducing the Central Bank Rate (CBR) by 0.5 percent, marking the first such reduction in over a year.
The decision to lower the CBR was attributed to a decrease in inflationary pressures and a growing necessity to bolster economic growth, as stated by the Bank of Uganda.
While the central bank had maintained a strict monetary policy over the past year to manage inflation, this approach inadvertently slowed down economic growth and hampered the uptake of credit.
Consequently, the Bank of Uganda announced that the Central Bank Rate, a pivotal tool for controlling inflation, has been revised down from 10 percent to 9.5 percent. This adjustment is anticipated to stimulate economic expansion within the range of 5 to 6 percent.
Previously, the CBR had been raised to 10 percent in June and sustained at that level despite diminishing inflationary pressures.
Additionally, the Central Bank took the step of reducing the Cash Reserve Requirement (CRR) by 50 basis points to 9.5 percent, a move aimed at injecting more liquidity into the financial markets.
During the presentation of the Monetary Policy Statement in Kampala, Deputy Governor Michael Atingi-Ego of the Bank of Uganda acknowledged improvements in near-term inflation projections compared to those of June 2023. However, he also highlighted persisting risks, including the potential impact of global inflation reduction on domestic inflation and the possible repercussions of a significant global economic slowdown on demand and prices for goods and commodities.
Atingi-Ego pointed out several external threats that could contribute to inflation, such as ongoing geopolitical conflicts, rising commodity prices, and disruptions in global trade.
Furthermore, the Bank of Uganda noted that sticky inflation in advanced economies might result in elevated interest rates, affecting economies that rely on foreign capital and potentially leading to higher exchange rates. Combined with adverse weather conditions, this could keep food prices at elevated levels.
Despite a globally uneven growth environment, Atingi-Ego emphasized the Ugandan economy’s resilience and ongoing recovery, forecasting an estimated annual growth of 5.3 percent for the 2022/23 financial year.
However, the Bank of Uganda also acknowledged weak domestic demand, which has impacted overall growth prospects. Data from the Uganda Bureau of Statistics revealed negative quarter-on-quarter average economic growth in the second and third quarters of the 2022/23 financial year, attributed to slowed growth in agriculture, industry, and services.
Private sector credit growth saw moderation due to stricter bank lending standards, and economic indicators pointed to a weakening growth momentum in the months of April to June.
Looking ahead, Dr. Atingi-Ego anticipates a gradual economic recovery in the 2023/24 financial year, with growth ranging from 5 to 6 percent. This recovery is expected to be driven by increased private sector consumption, investment in extractive industries, and improved exports.
Nonetheless, Dr. Atingi-Ego highlighted persistent global risks that could potentially impact domestic growth. Factors such as higher policy rates in advanced economies interacting with existing financial vulnerabilities, weaker foreign demand, and supply chain distortions due to geopolitical factors were identified as potential risks.
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