Monday, June 19, 2017

Uganda cuts rate 100 bps on subdued growth prospects

     Uganda's central bank lowered its Central Bank Rate (CBR) by a further 100 basis points to 10.0 percent, saying continued monetary easing is appropriate as prospects for economic growth remain weak and inflationary pressures are subdued.
     The Bank of Uganda (BOU) has now cut its rate by 200 basis points this year following cuts of 50 points in February and April. Since April 2016, when the BOU began its easing cycle, the key rate has been cut by 7 percentage points.
     The rate cut "will be consistent with achieving the core inflation target of 5 percent over the medium-term and will also support the recovery of real output in the economy," the BOU said.
     Uganda's inflation rate rose to 7.2 percent in May from 6.8 percent in April due to a rise in food prices along with higher energy prices. Food crop inflation accelerated to 23.1 percent from 21.6 percent in April as prolonged drought has led to poor harvests.
     But core inflation has remained relatively stable, rising to 5.1 percent in May from 4.9 percent in April, as the "relative stability of the exchange rate and subdued domestic demand have contributed to the dampening of core inflationary pressures over the last 12 months," the central bank said.
     The outlook for inflation has not changed substantially since the BOU's previous policy decision in April, with the central bank considering the jump in inflation in the last six months as temporary and expected to wane in the first quarter of the next financial year of 2017/18, which begins July 1.
     "In line with the previous forecast, inflation is forecast to stabilize around the target of 5 percent in 12 months," the BOU said.
     The fall in food and cash crops from drought, along with slow implementation of public investment projects and weak private sector credit,  has hit Uganda's economy, which slowed to growth of 1.4 percent in the final quarter of 2016 from 2.0 percent in the third quarter.
      In the full 2016/17 financial year, growth was estimated to have slowed to 3.9 percent, down from 4.7 percent in 2015/16. In February the BOU cut its growth estimate for 2016/17 to 4.5 percent from July's forecast of 5 percent and then in April said 4.5 percent was unlikely to be reached.
      In the 2017/18 financial year, the BOU expects an improvement of growth to 5.0 percent, still down from its April forecast of 5.5 percent, as public investments pick up, along with foreign direct investment, particular in the oil sector, and private sector credit recovers as lending rates decline.


     The Bank of Uganda issued the following statement:



"The annual headline inflation as measured by the change in Consumer Price Index (CPI) increased to 7.2 percent in May 2017 from 6.8 percent in April 2017. This was largely driven by a sharp increase in food crops and higher energy prices. Food crops inflation rose to 23.1 percent from 21.6 percent in April 2017, largely on account of the impact of adverse weather conditions on food crop production. Energy, Fuel and Utilities (EFU) in ation also rose to 7.0 percent from 5.3 percent, over the same period. Annual core inflation however remained relatively stable, increasing only marginally to 5.1 percent in May 2017 from 4.9 percent in April 2017. The relative stability of the exchange rate and subdued domestic demand have contributed to the dampening of core inflationary pressures over the last 12 months.

The economy has continued to grow at a moderate pace. According to the latest Gross Domestic Product (GDP) estimates released by Uganda Bureau of Statistics (UBOS), the economy is estimated to grow by 3.9 percent in the Financial Year 2016/17 compared to a growth rate of 4.7 percent in the Financial Year 2015/16. The slowdown is mainly due to the drought that affected agricultural production, coupled with slow implementation of public investment projects and weak private sector credit growth. Economic growth is projected to pick up to 5.0 percent in Financial Year 2017/18; supported by improved ef ciency and effectiveness in implementation of public investments; higher Foreign Direct Investments, particularly in the oil sector; and recovery in private sector credit growth, as lending interest rates continue declining. Indeed, monetary conditions have been easing with average lending rates declining to 20.5 percent in April 2017 from a peak of 25.2 percent in February 2016, a cumulative decline of 4.7 percentage points. Growth in the agricultural sector is also projected to improve, as normal weather conditions return.

The Bank of Uganda’s (BoU) forecasts for inflation have not changed substantively since the previous Monetary Policy Committee meeting. The supply side shock that caused inflation to edge-up in the last six months is temporary and is expected to wane in the first quarter of 2017/18. Moderation of food prices is expected over the near to medium-term. In addition, the favourable inflation outlook is driven by downward revisions to international oil prices and thus lower EFU inflation. In line with the previous forecast, inflation is forecast to stabilise around the target of 5 percent in 12 months.

With domestic inflationary pressures remaining subdued and given the continued weak growth prospects, the BoU judges that continued easing of monetary policy is appropriate. This will be consistent with achieving the core inflation target of 5 percent over the medium-term and will also support the recovery of real output in the economy. Accordingly, the BoU will reduce the CBR by 1 percentage point to 10 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 to14 percent and 15 percent, respectively. "

    www.CentralBankNews.info




0 comments:

Post a Comment