No change expected ahead of BOU rate announcement

By Samuel Sanya

Bank of Uganda's (BoU) monetary policy committee is set to meet on Wednesday to determine whether the benchmark Central Bank Rate (CBR) should be increased, reduced or kept the same.

The meeting will then be followed by a briefing by Governor Emmanuel Tumusiime-Mutebile who will announce the monetary policy committee's decision. 

Former Central Banker and CEO of Alpha Capital Partners - Stephen Kaboyo predicts that the monetary policy stance for February and March 2017 will be a high-wire act for BOU due to slowing economic growth, and inflation on the uptrend, which is not about to terminate due to the prolonged drought that has hit the country. 

He also pointed out that there is underlying depreciation pressure on the shilling and that global economic dynamics are dragging Uganda's economy.  

"In my view striking the right balance between growth and price stability at this time may necessitate BoU to leave the policy rate unchanged" Kaboyo said.

"This move would foster growth at the point where weakness in the economy is wide spread while the increased spending on infrastructure expected to lift productivity will take time to be felt," he added. 

The benchmark Central Bank Rate (CBR) has been reduced over the past year to 12% as means to stimulate commercial bank lending, however, a huge non-performing loan book has scared off many banks from lending to the private sector. 

Central Bank data indicates that despite a surge in loan applications, new loans to the private sector are growing at just 3%, below targets of 15%. This has affected aggregate demand for goods and services, slowing economic growth to 4%.  

Jibran Qureishi, the Standard Bank chief economist for East Africa points out that due to a strong dollar, food inflation, political activity in Kenya, south Sudan and DR Congo and exit of offshore investment in one year treasury bills in 2017 will see the shilling close the year between sh3,800 and sh3,900; weaker than the average sh3,600 in February. 

 "The cap on interest rates in Kenya has affected private sector credit growth. Whenever credit growth in Kenya declines, there is a decline in imports from Uganda. Slow private sector growth and the elections will affect exports" he said.

Given the grey outlook, Qureishi notes that the CBR should be held 12%. He explains that this will enable a series of earlier rate reductions to take effect while shielding the economy from inflation pressures.