Uganda cuts rate 50 bps to boost credit and economy

     Uganda's central bank cut its Central Bank Rate (CBR) by 50 basis points to 9.5 percent, saying a "cautious easing of monetary policy is warranted to boost private sector credit growth and to strengthen the economic growth momentum" as inflation is forecast to remain around the medium term target while economic activity is slowly gaining momentum.
     The Bank of Uganda (BOU) has now cut its rate by 250 basis points this year following cuts in February, April and June. In 2016 the rate was cut by 500 points.
     The BOU's band around CBR was maintained at plus/minus 3 percentage points and the margin on the discount rate at 4 percentage points so the rediscount rate and the bank rate were lowered to 13.5 percent and 14.5 percent, respectively.
      Uganda's headline inflation rate rose slightly to 5.3 percent in September from 5.2 percent in August while core inflation dropped to 4.1 percent in August from 4.5 percent in July.
     "The consumer price index (CPI) data indicates that inflation remains subdued," the BOU said, adding the rise in inflation was largely due to higher costs of fuels while food crops inflation continued to fall due to to improved supply.
     The central bank's outlook for inflation was unchanged since the previous meeting of the Monetary Policy Committee in August, with core inflation seen remaining within the target range of 5 percent. The bank's target is within a range of plus/minus 2 percentage points.
      Upside risks remain muted, the BOU said, with the exception of possible higher food prices due to crop pests and severe rains in parts of the country. The inflation forecast is also based on the assumption that the exchange rate of the shilling would remain around the current level with "a stronger depreciation" raising the risk of higher inflation.
      After falling sharply in 2014 and 2015, Uganda's shilling depreciated further last year but at a slower pace. This year the shilling has remained more stable and was trading at 3,600 to the U.S. dollar today, practically unchanged form 3,602 at the start of this year.
      Uganda's economy recovered in the second half of the 2016/17 financial year, which ended June 30, after bad weather hit the agricultural sector in the first half of the year. Growth in 2016/17 was estimated to have slowed to 3.9 percent from 4.7 percent in 2015/16.
      However, the BOU said private sector credit remains sluggish but confirmed its forecast from August for economic growth in the current 2017/18 financial year of 5.0 to 5.5 percent, a bit lower than potential growth.
      Over the medium term growth is projected to accelerate to between 6.0 and 6.5 percent.
      In the second calendar quarter, Uganda's Gross Domestic Product grew by an annual rate of 5.5 percent, up form 4.6 percent in the first quarter.


    The Bank of Uganda issued the following statement:

"The consumer price index (CPI) data indicates that inflation remains subdued. Annual headline and core inflation increased marginally to 5.3 percent and 4.2 percent in September 2017 from the respective rates of 5.2 percent and 4.1 percent in August 2017. The rise in inflation was largely driven by an increase in the cost of fuels, which pushed up the Electricity, Fuels and Utilities (EFU) inflation to 10.6 percent in September 2017 from 7.8 percent in August 2017. Annual food crops inflation however continued to fall, declining to 9.6 percent in September 2017 from 11.7 percent in August 2017, largely on account of improved food supply.

The latest quarterly GDP data released at end September 2017 by UBOS indicates that growth recovered in the second half of 2016/17. Quarterly growth rates of only 0.6 percent and 1.1 percent were recorded in the first two quarters of 2016/17, mainly because of bad weather that affected the agricultural sector. But growth rates accelerated to 1.8 percent and 1.9 percent respectively in the third and fourth quarters of the financial year. The growth in private sector credit however remains sluggish. The economy is projected to grow at an annual rate of 5.0 to 5.5 percent in FY2017/18, which is a bit lower than estimates of potential GDP growth. Economic growth is however projected to accelerate to between 6 and 6.5 percent over the medium-term. The outlook continues to be supported by accommodative monetary policy, improvement in public investment management and an improvement in the global economy.

The Bank of Uganda’s (BoU) forecasts indicate that the inflation outlook remains unchanged since the last Monetary Policy Committee meeting in August 2017, with annual core inflation forecast to remain within the target range of 5 percent over the short to medium-term. The upside risks to inflation remain muted, with the exception of the possibility of higher food prices due to crop pests that are affecting agricultural sector and severe rains in some parts of the country. In addition, the forecasts are based on the assumption that the exchange rate will remain around its current level. A stronger exchange rate depreciation, however, would increase the risk of higher inflation.

Given that annual 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. 

The BoU has therefore decided to reduce the Central Bank Rate (CBR) by 0.5 percentage points to 9.5 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 13.5 percent and 14.5 percent, respectively. "

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