KAMPALA: In order to combat the country’s skyrocketing inflation, the Bank of Uganda (BoU) raised the Central Bank Rate (CBR) by another percentage point to 8.5 percent.
The decision was taken at an extra-ordinary Monetary Policy Committee (MPC) meeting held on Monday, July 4, 2022.
In a statement issued on Tuesday, July 5, 2022, the BoU Deputy Governor Dr. Michael Atingi-Ego, said the increase was necessary to stabilise inflation.
“While the inflationary pressures are likely to be temporary, the MPC assessed that a markedly higher policy rate is needed to stabilise inflation around the target,” he said.
“Accordingly, the MPC raised the CBR to 8.5 percent and maintained the band on the CBR at +/-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 discount and bank rates are now 11.5 percent and 12.5 percent, respectively, “he added.
The Cash Reserve Requirement was also raised by 2 percentage points to 10%, effective June 23, 2022.
“MPC considers that the monetary policy stance will have to be tightened even further so as to ensure that inflation eases back to target in the medium-term,” he added.
Dr. Ego observed that inflation continues to rise, owing largely to external cost pressures from higher global food and energy prices, ongoing global production and distribution challenges, and rising domestic food crop prices due to dry weather across the country.
Annual headline and core inflation increased to 6.8 percent and 5.5 percent, respectively, in June 2022, from 6.3 percent and 5.1 percent in May 2022.Food crop inflation has risen dramatically from 0.7 percent in February 2022 to 14.5 percent in June 2022.
He said overall, economic activity is projected to remain modest as the shocks to commodity prices, production and distribution disruptions, and global inflation continue to dim the prospects for domestic economic growth.
“Economic growth is still projected in the range of 4.5-5.0 percent in 2022 and rising slightly to 5.0-5.5 percent in 2023, in part supported by public investments.” Weaker external demand, high domestic inflation, and resultant tighter domestic financial conditions will constrain exports, consumption, and investment, he added.
According to the June 2022 preliminary GDP estimates by the Uganda Bureau of Statistics (UBoS), the economy grew by 4.6 percent in the Financial Year (FY) 2021/22 from a revised growth rate of 3.5 percent the previous year.
The economic growth was driven largely by private investment, despite imports far exceeding exports. On the production side, the industry and services sectors were the main drivers of growth, with some of the services sector activities, such as education and trade, recovering.
However, BoU said households’ and businesses’ expectations of economic developments have grown more tepid, and the global economic outlook is highly uncertain.
The Central Bank observed that “Indeed, the Composite Index of Economic Activity (CIEA), a high-frequency indicator of economic activity, continues to signal a slowdown in the pace of economic recovery in the second half of the financial year. The CIEA growth in the three months to May 2022 decelerated to 0.9 percent from 2.1 percent in the three months to February 2022,” the Central Bank observed.