BoU Raises Inflation Forecast Due to Shilling Depreciation

bou raises inflation forecast due to shilling depreciation
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The Bank of Uganda (BoU) has revised its inflation forecast upwards for the short term in response to the depreciation of the shilling. January’s inflation climbed to 2.8 percent and is expected to further rise, though the BoU anticipates it will remain below the medium-term target of 5 percent.

The shilling has experienced relative pressure, opening at Shs3,818.25 per dollar and slightly dropping to Shs3,818.75 by midday.

During the Monetary Policy Statement presentation for February, BoU Deputy Governor Michael Atingi-Ego highlighted the decision to maintain the Central Bank Rate at 9.5 percent to stabilize inflation around the target in the medium term. This decision aligns with the assessment of inflation and growth prospects, supporting socioeconomic transformation.

The inflation forecast projects stability around 3 percent in the first half of 2024, reflecting steady demand conditions and global price pressure easing. However, inflation risks persist, particularly concerning changes in global commodity prices and financial market instability.

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The rise in domestic debt, primarily driven by government borrowing, poses risks such as increased interest rates and crowding out of the private sector from the credit market. Despite warnings, government borrowing in the domestic market has steadily increased over the years, leading to significant growth in domestic debt.

Interest rates have remained volatile due to factors like lenders’ risk aversion and rising default rates, reaching a peak of 20.14 percent in December 2023. This high cost of business financing underscores the challenges faced by businesses in accessing credit.

Government borrowing trends, outlined in the Auditor General’s report, reveal a substantial increase in domestic debt over the past five years, with significant growth recorded during the 2020/21 financial year.

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