Bank of Uganda cuts key rate amidst improved inflation outlook in April

KAMPALA, Uganda, Capital Markets in Africa —  Bank of Uganda (BOU) reduces its benchmark lending rate on Monday, because of the fact that demand pressures on inflation are more subdued than at the time of the last and indications are that domestic demand is likely to remain constrained.

The central bank Governor Emmanuel Tumusiime-Mutebile informed a news conference the bank had dropped the rate to 16 percent from 17 percent previously, adding that real growth had dipped at the start of this year and that consumer demand remained subdued.

Given that the inflation outlook has improved and to ensure that real economic growth remains close to potential, the BoU believes that it is warranted to cautiously ease monetary policy. The BoU will therefore reduce the CBR by 1 percentage point to 16 percent. The band on the CBR will be maintained at +/-3 percentage points and the margin on the rediscount rate at 4 percentage points on the CBR. Consequently, the rediscount rate and the bank rate have been reduced to 20 percent and 21 percent, respectively,” he stated.

The central bank Governor highlighted that inflation prospects had improved “mainly because of the easing of the exchange rate depreciation pressures, faster decline of food prices, and the subdued global economic outlook.”

The bank uses core inflation, which excludes food, metered water, fuel and electricity, to determine its monetary policy and had seen it peaking at 6-8 percent in the second quarter. Core inflation rose to 6.9 percent in March, up from 6.8 percent in February.

The BoU now forecasts that both headline and core inflation will remain in the range of 6.5 +/- 1 percent in H 1-2016 before gradually declining to the BoU’s medium-term target of 5 percent in Q1-2017. Nonetheless, there are upside risks to this outlook, including the future path of the exchange rate, which in part is contingent on external economic environment.