Monday, June 8, 2020

Uganda cuts rate 3rd time as growth forecast lowered

     Uganda's central bank cut its benchmark interest rate for the third time in the current easing cycle, and for the second time this year, against a backdrop of declining inflation and another downward revision of its growth forecast this year.
     The Bank of Uganda (BOU) cut its Central Bank Rate (CBR) by another 100 basis points to 7.0 percent and has now cut it by 200 basis points this year following a cut in April, and by 300 points since it began monetary easing in October last year.
     "Although Uganda is gradually easing the lockdown measures instituted to contain the spread of the pandemic, the adverse consequences of the global and domestic supply chain disruptions could persist through the remaining part of 2020," BOU said.
     The second quarter of this year will see the most severe economic slowdown before a gradual recovery is expected to set in during the third and fourth quarters of this year, BOU said, adding household spending, investment, exports and imports are seen declining this year.
     BOU revised downward its growth forecast for Uganda to a range of 2.5 to 3.5 percent from April's forecast of 3.0 to 4.0 percent, with the strength of the recovery depending on how the country opens up for economic activity safely.
     In February BOU had expected growth this year of 5.5 to 6.0 percent.
     In 2021 economic growth is seen recovering further with growth of 4 to 5 percent and then between 6 and 6.5 percent in 2022.
     But the combination of the COVID-19 pandemic, extreme weather, and volatility in global financial markets could weigh on Uganda's balance of payments, potentially destabilizing the foreign exchange market and dampening economic growth, BOU cautioned.
     As many other currencies, Uganda saw its shilling tumble in March as global financial markets began to react to the spread of the coronavirus. The shilling fell 6.2 percent to a new record low of 3919.7 to the U.S. dollar on March 25 from Feb. 1.
     But since then the shilling has risen and was trading at 3,769.3 to the dollar today, down 2.6 percent this year.
     With economic growth slowing, inflation has remained subdued, with headline inflation easing to 2.8 percent in May from 3.2 percent in April.
     BOU forecast inflation will remain below its 5.0 percent target in the next 12 months despite a temporary rise in transport costs in months ahead due to the global economic slowdown and low food crop inflation.
     Risks to inflation from a depreciation of the shilling is seen contained as the pass-through from a depreciation are expected to remain low due to subdued demand, BOU said.
     Last week the executive board of the International Monetary Fund approved some US$491.5 million under its rapid credit facility to Uganda to help finance the health, social protection and macroeconomic stabilization measures along with meet the country's "urgent" balance of payments and fiscal needs from the pandemic.


Post a Comment