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Sunday,September 23,2018 15:14 PM

Bank of Uganda cuts benchmark CBR to 11%

By Samuel Sanya

Added 13th April 2017 07:28 AM

The economy was initially projected to grow by 5%, however, projections have been slashed to 4.5% after the country suffered under a strong dollar, a prolonged dry spell and a high interest environment which affected economic activity.

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The economy was initially projected to grow by 5%, however, projections have been slashed to 4.5% after the country suffered under a strong dollar, a prolonged dry spell and a high interest environment which affected economic activity.

Bank of Uganda cut its benchmark Central Bank Rate (CBR) to 11% from 11.5% to signal commercial banks to slash their lending rates in a bid to spur business activity.

However, economists have warned that easing monetary policy to bring down lending rates alone will not be sufficient to boost economic growth.

The economy was initially projected to grow by 5%, however, projections have been slashed to 4.5% after the country suffered under a strong dollar, a prolonged dry spell and a high interest environment which affected economic activity.

While presenting the bi-monthly monetary policy statement for April and May 2017, Professor Emmanuel Tumusiime-Mutebile, the Bank of Uganda (BoU) Governor said: "Given that core inflation is forecast to remain around the medium-term target of 5% and in line with efforts to support private sector credit and economic growth momentum, Bank of Uganda believes that there is scope to continue easing monetary policy."

He pointed out that the economy grew by a paltry 0.8% in the quarter to December 2016, which was better than the negative 0.1% contraction in the previous quarter to September 2016.

Prof. Mutebile noted that Uganda's current account has improved because of stronger export proceeds, workers remittances, and weak import growth. He added that stability of the exchange rate and subdued domestic demand has dampened inflationary pressures.

Alpha Capital Partners Stephen Kaboyo had predicted a further easing of interest rates before the announcement was made pointing out that the Central Bank is keen to spur growth and that core inflation significantly dropped in March.

Razia Khan, the Standard Chartered Bank Chief Economist for Africa noted that the rate cut was expected due to food price pressures. She said: "However, with the BoU cutting its FY 17 growth projection to 4.5%, it is clear that growth concerns are overriding."

"The BoU still sees core inflation 'around 5%' in 12 months' time, allowing it the space to keep its easing relatively front-loaded.  Given recent banking sector developments, with the authorities intervening in a large lender in 2016 (the bank, responsible for c. 10% of private sector credit growth was found to be under-capitalised), it is not clear that easing alone will be able to drive a robust private sector credit recovery in the near-term," she added. 

 

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