Uganda Cuts Benchmark Rate to Record Low to Boost Credit

KAMPALA (Capital Markets in Africa) Uganda’s central bank reduced its benchmark interest rate to support economic growth even as lending to businesses and individuals begins to show signs of improvement.

Policy makers at the Bank of Uganda cut the rate by 50 basis points to 9.5 percent, extending an easing cycle that began in April 2016. Prior to Tuesday’s decision, they’d reduced the rate by a total of 700 basis points in eight of the past nine meetings.

“Given that core inflation is forecast to remain around the medium-term target of 5 percent and economic activity is slowly gaining momentum, a cautious easing of monetary policy is warranted to boost private-sector credit growth and to strengthen the economic growth momentum,” Governor Emmanuel Tumusiime-Mutebile told reporters in the capital, Kampala.

Private-sector credit grew by 4.3 percent in the year through June 2017 after expanding 15.2 percent a year earlier, according to a statement on the Bank of Uganda’s website. Lending contracted 0.9 percent in December, according to Finance Ministry statistics. The economy is projected to grow 5 percent to 5.5 percent in the 2017-18 fiscal year, “a bit lower than estimates of the potential GDP growth,” Tumusiime-Mutebile said.

“These growth rates are still relatively subdued in a historic context, with private-sector credit growth having averaged 19 percent year-on-year in 2015,” according to a note by NKC Africa Economics emailed before the decision. “Still, monetary authorities will be content with the general downward trend in consumer price inflation.”

The Paarl, South Africa-based economics research body expects the central bank to maintain its “current policy stance for the remainder of the year.”

Fighting Inflation
Uganda’s inflation rate is near the lowest since November last year and came in at 5.3 percent in September as food-price growth slowed.

The central bank’s “hard-won anti-inflation credentials” gave it room to cut below the psychologically important 10 percent level, according to Razia Khan, a London-based Africa economist at Standard Chartered Plc. Muted demand underpinned the Ugandan shilling’s stability, which contributed to the decision, she said in an emailed note.  The currency has lost only 0.2 percent this year against the dollar, after depreciating 6.2 percent in 2016.

While loan-rate spreads are still high, the inflation-targeting regime and better banking supervision will see them decline, Khan said.

“For now, we believe we are likely close to the floor in the policy rate,” Khan said. “Uganda would need to see a further structural improvement in fiscal policy to be able to reduce rates to much lower levels.”

Source: Bloomberg Business ‘News