KAMPALA: The Bank of Uganda’s recent decision to reduce the Central Bank Rate (CBR) by 25 basis points to 10.0 percent marks a significant shift in the country’s monetary policy, reflecting a cautiously optimistic outlook on the economy. This reduction is a strategic move aimed at fostering economic growth while maintaining inflation within manageable levels.
Impact of CBR Reduction
The Central Bank Rate is a critical lever in the economy as it influences the cost at which commercial banks borrow from the central bank. A lower CBR typically leads to reduced interest rates on loans, making borrowing cheaper for businesses and consumers. This can stimulate investment and consumption, thereby boosting economic growth. However, the Bank of Uganda’s Monetary Policy Committee (MPC) took a modest approach with the 25-basis point cut, signaling a cautious easing rather than an aggressive stimulus.
This careful reduction indicates that while the MPC acknowledges the need for economic growth, it remains vigilant about the risks of inflation, particularly given the uncertain global economic environment. The reduced rate is expected to support economic activity by making credit more accessible, especially as the economy shows signs of recovery.
Inflation Trends and Projections
The MPC’s decision to lower the CBR comes against the backdrop of moderating inflation rates. In the twelve months leading up to July 2024, Uganda’s annual headline inflation averaged 3.2 percent, while core inflation was at 3.0 percent—both below the central bank’s medium-term target of 5 percent. This decline in inflation can be attributed to the fading effects of global shocks, including the war in Ukraine and the COVID-19 pandemic, as well as a stable exchange rate that has appreciated since March 2024, according to the Monetary Policy Statement issued on August 7, 2024, by deputy governor Bank of Uganda Michael Atingi-Ego.
Despite this overall stability, inflation did see a slight uptick in July 2024, driven primarily by rising costs in services such as transport and accommodation. The central bank projects that inflation will remain below the 5 percent target for the fiscal year 2024/25 but cautions that seasonal factors could cause moderate increases in the short term. The Bank of Uganda’s stance reflects a balanced view of the inflation risks, considering both domestic and international factors that could influence price levels.
Economic Growth Prospects
Uganda’s economy has shown resilience, with GDP growth rebounding in the last two quarters of FY 2023/24, averaging 6.7 percent year-on-year. This recovery is broad-based, cutting across various sectors and indicating a strengthening in both business and consumer confidence. The Bank of Uganda projects economic growth to remain robust, forecasting a growth rate between 6.0 percent and 6.5 percent for FY 2024/25, with medium-term growth expected to exceed 7 percent.
However, the central bank warns that the growth outlook has vulnerabilities. Potential geopolitical tensions, rising global commodity prices, and protectionist trade policies could dampen global economic activity, subsequently affecting Uganda’s export-driven sectors. Additionally, domestic factors such as high borrowing costs and possible further depreciation of the Ugandan shilling could pose challenges to sustained economic growth.
Strategic Policy Adjustments
The Bank of Uganda’s decision to slightly ease the monetary policy reflects a strategy of cautious optimism. By reducing the CBR and maintaining the flexibility to adjust the policy stance based on incoming economic data, the central bank aims to support sustainable economic growth while keeping inflation in check. This approach underscores the delicate balance the Bank of Uganda seeks to maintain between stimulating the economy and preventing inflation from spiraling out of control.
The reduction in the rediscount and bank rates to 13.0 percent and 14.0 percent, respectively, further illustrates the central bank’s commitment to fostering a favorable environment for economic growth, particularly in a period of global uncertainty. As the economy continues to navigate these challenges, the Bank of Uganda’s measured approach to monetary policy will be crucial in ensuring stability and growth.
