By Samuel Sanya
Bank of Uganda (BOU) has held the benchmark Central Bank Rate (CBR) at 12% for a fourth time running, but expects past rate reductions to inspire further commercial bank lending rate reductions.
Louis Kasekende, the BOU deputy governor, noted that recent strong foreign exchange inflows have strengthened the shilling, adding that core inflation is likely to stay within Central Bank’s target at 5% throughout the year.
“The primary objective of monetary policy remains holding the medium-term annual inflation to around the 5% target without compromising future recovery of the economy….the Bank of Uganda will maintain the Central Bank Rate (CBR) at 12% in March 2013,” he told journalists in Kampala.
The CBR was introduced in 2011 after inflation figures hit the roof. It is largely been effective as annual headline inflation dropped to 3.9% in February 2013, from highs of 30% about a-year-and-a-half ago.
Commercial bank shilling lending rates declined only 0.6 percentage points to 24.22%, the highest levels seen in the recent years, condemning private sector credit growth and economic growth to remain below potential.
The economy is projected to grow at 5%, below its potential of 7% as it continues to recover from the aftershocks of the global financial crisis and high inflation.
Stephen Kaboyo of the Alpha Capital Partners noted that the BOU’s decision to hold its key rate echoes a cautious stance and is guided by the need to maintain inflation near the target of 5%.
“A cut in CBR at the present time would not support the shilling. It would potentially undo what has been achieved by building up inflationary pressures yet again as the fragile recovery takes shape,” he said.
Razia Khan of the Standard Chartered Bank pointed out that the Central Bank is correct to focus on the outlook for inflation rather than past inflation in formulating its decision to steady economic growth.
“Money supply growth at 17.45% has recovered nicely, but with weak export growth and a sizeable trade imbalance still risks to the currency persist,” she said.