Monday, August 13, 2018

Uganda holds rate but sees rising inflation, strong growth

     Uganda's central bank kept its benchmark Central Bank Rate (CBR) at 9.0 percent, saying a neutral monetary policy stance is warranted in order to keep inflation close to target and maintain sustainable economic growth.
      The Bank of Uganda (BOU) forecast that core inflation will continue to rise and peak around 6 -7 percent in the second half of the current 2018/19 financial year before stabilizing around its medium-term target of 5 percent by the end of 2019.
      The BOU, which has maintained its key rate since February this year, after a 2-year easing cycle, also cautioned about a rise in inflation in its June policy statement but attributed this to stemmed a recovery in food prices, the expected closure of the output gap and higher taxes.
       Food prices, however, are no longer seen as a major risk to the inflation outlook and are projected to remain low though this can quickly change depending on weather conditions.
       The BOU today said that higher oil prices and a depreciation of the shilling's exchange rate could result in higher inflation.
       In July headline inflation rose to 3.1 percent from 2.2 percent while core inflation jumped to 2.5 percent from 0.8 percent on a combination of higher oil prices, shilling depreciation and a one-off rise in communications taxes, and fuel excise taxes
     "A key risk to the inflation outlook is the shilling exchange rate which remains vulnerable to domestic market conditions and the possibility of tighter global financial conditions," BOU said.
     The shilling fell from March to late June when BOU on June 27 sold U.S. dollar for the third time that month after the shilling hit a new all-time record low of around 3,900 to the dollar.
      "The heightened depreciation pressures experienced during the last quarter of FY 2017/18 were in part driven by speculate activity in the foreign exchange market, which resulted in the exchange rate overshooting its long-run equilibrium," BOU said, adding its reserves remain adequate to maintain stability in the currency market.
      The shilling recovered during July but fell 2.2 percent today to 3,749 following the BOU's decision and general dollar strength on heightened fears around Turkey. This year the shilling is down 3 percent against the dollar.
      Uganda's economy is continuing to strengthen, BOU said, estimating Gross Domestic Product growth for 2017/18, which began July 1, of 5.8 percent compared with 3.9 percent in 2016/17.
      In 2018/19 the economy is forecast to strengthen further to 6 percent and then average growth of about 6.3 percent in the medium term, supported by public infrastructure investments, improving agricultural productivity, a recovery in foreign direct investment and strengthening private sector credit growth due to past monetary policy easing.
       BOU said weighted average lending rate fell to 17.7 percent in June from 25.2 percent in February 2016 when it began easing policy. Between April 2016 and February 2018 the BOU cut CBR by a total of 800 basis points.



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