Africa-Press – Uganda. Bank of Uganda has for the first time in more than a year reduced the Central Bank Rate (CBR) by 0.5 percent.
The reduction, Bank of Uganda said, comes on the back of decelerated inflationary pressures, amid growing need to support economic growth.
Over the last 12 months the central bank has administered a tight monetary policy to control inflation but on the other hand, it has impacted economic growth and slowed credit uptake.
Therefore, Bank of Uganda yesterday indicated the Central Bank Rate, which is a key measure in controlling inflation, had been reduced to 9.5 percent from 10 percent, noting that this would catalyse economic growth of between 5 percent and 6 percent.
The CBR had been increased to 10 percent in June, and had been maintained at the same rate even as inflationary pressures reduced.
The Central Bank also reduced the Cash Reserve Requirement (CRR) by 50 basis points to 9.5 percent, which is expected to release more cash in the financial markets.
Presenting the Monetary Policy Statement in Kampala yesterday, Bank of Uganda Deputy Governor Michael Atingi-Ego, said there were still risks despite improvements in near-term inflation projections compared to June 2023.
“On the downside, global inflation might continue to decrease, potentially affecting domestic inflation. A significant global economic slowdown could also impact inflation by reducing global demand, leading to lower prices for goods and commodities,” he said, noting that external risks continue to present challenges and might create fresh inflationary pressures.
For instance, he said, factors such the ongoing geopolitical conflicts, rising commodity prices and disruptions in global trade, continue to present threats that could push up inflation.
Bank of Uganda also noted that sticky inflation in advanced economies might also mean higher interest rates, which could affect economies needing foreign capital as this could return high exchange rates, which coupled with adverse weather conditions, could keep food prices elevated.
Atingi-Ego also noted that the economy has demonstrated resilience and continues to recover well despite an uneven global growth environment with estimated annual growth of 5.3 percent in the 2022/23 financial year.
Bank of Uganda also noted that domestic demand has remained weak which has in turn impacted the general growth outlook.
Data from Uganda Bureau of Statistics indicates that quarter-on-quarter average economic growth was -6.5 percent in the second and third quarters of the 2022/23 financial year, impacted by slowed growth in agriculture, industry and services, which returned -21.6 percent and -1.3 percent growth activity.
Private sector credit growth was moderate amid tightening of bank lending standards while high frequency economic indicators pointed to weakening growth momentum during April to June.
Dr Atingi-Ego said, going forward, economic growth is expected to recover gradually, ranging from 5 percent to 6 percent in the 2023/24 financial year, driven by a recovery in private sector consumption, investment in extractive industries, and improved exports.
Global risks
Dr Atingi-Ego said a number of risks continue to persist in the global economy, which poses a risk to domestic growth.
For instance, he said it was possible that higher policy rates in advanced economies could interact with long-standing global financial vulnerabilities, such as elevated levels of debt, to significantly slow global growth.
Other risks, he said, include weaker foreign demand, which could restrain export growth resulting in deteriorating of current account deficit and higher external financing needs and a resurgence of supply chain distortions due to geopolitical factors.
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