Central Bank targets 7% inflation rate
Publish Date: Jan 10, 2010
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By Sylvia Juuko

THE CENTRAL bank will restrict broad money growth to 2l.2% in its monetary programme for 2009/10 as a measure to achieve a core inflation rate of 7.5% by June.

Broad money is a measure of money supply that includes currency in circulation and deposits of the non-bank public.

“The aim of the monetary policy in 2009/10 is to ensure that core inflation declines to 7.5% in June and to provide sufficient liquidity to allow the economy to grow at 6.3% in 2009/10,” it said in a report.

This compares to a broad money growth target of 26.3% in the financial year 2008/2009. To control inflation, the Central bank uses a range on instruments in pursuing its monetary policy.

Its monetary policy decisions usually target core inflation which excludes food items, electricity, fuel and metered water.

The Uganda National Bureau of Statistics said in a report last year that underlying inflation for the month ended December 2009 dropped to 7.4% compared to 8.8% in the year ended November 2009.
The Central bank said it was determined to bring core inflation back into the target range of 5% by 2010/11 fiscal year.

“However, Bank of Uganda will tighten the monetary targets for June 2010 if the shock to food prices feeds through to core inflation to the extent that the target of 7.5% might not be met,” the report added. It further pointed out that the target for core inflation remained at 5% in 2010/11.

The report also noted that annual core inflation averaged 9.8% in the period July 2009 to October 2009, compared to 13.3% in the corresponding period of 2008.

The bank’s conduct of monetary policy in the first quarter of 2009/2010 financial year was focused on availing liquidity to the financial system to support aggregate demand in the economy.

The report said flexibility was also introduced in the implementation of the reserve money programmewith a clear distinction between structural (long-term) liquidity and short-term liquidity needs of the market.

“Sterilisation of structural liquidity was done through a combination of sales of treasury bills, treasury bonds, and foreign exchange in the interbank foreign exchange market, while the repurchase agreement and reverse repos were the main instruments used in managing short-term liquidity,” the bank said.

However, the bank noted that the 2.2% reduction in currency issued in the first four month of this financial year and a widening trade deficit and slow down in credit growth points to subdued aggregate demand in the economy during the 2009/10 period.

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