The Bank of Uganda has decided to keep the Central Bank Rate (CBR) at 9.5 percent, despite a recent drop in inflation rates during September.
The CBR is a tool that the central bank uses to control the cost of money (commercial bank interest rates), aiming to influence the flow of money in the economy and thereby control inflation.
In September, the annual headline inflation rate decreased to 2.7 percent from the 3.5 percent recorded in August. Additionally, core inflation, which excludes food and energy prices, dropped from 3.3 to 2.4 percent, marking the lowest level in 22 months.
BOU’s Acting Governor, Michael Atingi-Ego, acknowledged that inflation has been brought under control, but he also noted potential risks to the situation. These risks include the possibility of poor agricultural output, which could lead to higher food prices, increased interest rates, and elevated global commodity prices. Atingi-Ego attributed the low inflation to reduced public spending, which has affected the overall economy.
The downward trend in inflation is expected to continue for several months due to factors such as lower imported inflation, reduced food prices, and decreased public demand for goods and services. However, it is anticipated that inflation will gradually rise back towards the 4 to 5 percent range by the end of the next year. It should be noted that these are predictions, and factors like a bumper agricultural output or continued reductions in import prices could alter the trajectory.
Potential factors that could contribute to inflation include a decline in the foreign exchange rate, geopolitical developments in Europe, tensions between the West and China, and further cuts in oil production by producing countries.
For now, Dr. Atingi-Ego indicated that as inflation remains under control, the Monetary Policy Committee intends to continue easing policy rates.
According to estimates by the Uganda Bureau of Statistics, the economic prospects and outlook have remained relatively stable over the past two months. In the second quarter of 2023, there was a real GDP growth of 5.2 percent, compared to the 0.4 percent growth recorded in the first quarter. This growth was primarily driven by the industry and services sectors, as reported by UBOS. These sectors are expected to continue propelling economic growth, supported by investments in the oil and gas and mining industries. A growth rate of approximately 6 percent is anticipated for the financial year 2023/2024 if potential risks do not materialize.
The Deputy Governor also downplayed the immediate impact of the World Bank’s earlier statement this year, in which it announced the halt of future loans to Uganda. He explained that the loans affected for this year amount to approximately $36 million (about 135 billion Ugandan shillings). Loans already approved by the board will continue to be disbursed under strict monitoring by the World Bank. Atingi-Ego mentioned ongoing discussions between the government, represented by the Ministry of Finance, Planning, and Economic Development, and the World Bank to resolve the impasse while alternative sources are being explored to cover the impending gap.