KAMPALA: Central Bank increases lending rate for the first time since 2018 as inflation bites harder
Bank of Uganda (BoU) has increased the Central Bank Rate (CBR) for June 2022 by 1 percentage point to 7.5 percent, the first time it has done so since 2018 as the economy continues to suffer under the weight of rising commodity prices.
BoU had maintained CBR at 6.5% over the recent years to sustain economic recovery following the effects of the Covid-19 pandemic.
But Dr Michael Atingi- Ego, the BoU Deputy Governor, said CBR has been increased due to the rapidly increasing inflation that has seen annual headline rise to 6.3 percent in May 2022.
“While the inflationary pressures are likely to be temporary, the worsening economic outlook, uncertainty, and risks ahead motivated the MPC [Monetary Policy Committee] to tighten monetary policy to contain demand pressures until supply catches up,” Dr Ego said in a statement issued on Thursday, June 2, 2022.
“Accordingly, the MPC has raised the CBR to 7.5 percent and maintained the band on the CBR at +1- 2 percentage points. The margins on the CBR for the rediscount and bank rates remain at 3 percentage points and 4 percentage points, respectively. Consequently, the rediscount and bank rates are now 10.5 percent and 11.5 percent, respectively,” he said.
The Deputy Governor added that the weakening of the Uganda shilling against the US dollar coupled with rising food and energy prices have worsened the inflation outlook since the April 2022 forecast round.
“Higher business costs are likely to spread into consumer prices, thereby pushing inflation higher in the coming months. Consequently, annual headline and core inflation are now forecast to average 7 percent and 6.1 percent, respectively, in 2022, which is higher than earlier projections,” he said.
The Deputy Governor explained that BoU will continue to raise the CBR until inflation is firmly contained around the medium-term target.
Also, the BoU will phase out the remaining targeted credit relief measures for the education and hospitality sectors on 30 September 2022, Dr Ego said.
Similarly, the Covid- I 9 Liquidity Assistance Program (CLAP) for managing potential liquidity risks arising from the pandemic as well as the restriction on payment of dividends and other discretionary distributions of Supervised Financial Institutions expired on 31 May 2022.
According to BoU, annual headline and core inflation rose to 6.3 percent and 5.1 percent in May 2022 from 2.7 percent and 2.3 percent in January 2022, respectively.
Supply and demand imbalances that were caused by the Covid-19 pandemic and heightened by the Russia-Ukraine conflict are the main underlying sources of broader price pressures, Dr Ego said.
He added that the weakening of the Uganda shilling against the US dollar coupled with rising food and energy prices have worsened the inflation outlook since the April 2022 forecast round.
“Higher business costs are likely to spread into consumer prices, thereby pushing inflation higher in the coming months. Consequently, annual headline and core inflation are now forecast to average 7 percent and 6.1 percent, respectively, in 2022, which is higher than earlier projections. Inflation is projected to peak in the second quarter of 2023 before gradually declining to stabilise around the medium-term target of 5 percent by mid-2024,” the Bank said.