Banks set to cut interest rates

Feb 02, 2012

Commercial banks are expected to follow suit after Central Bank cut its key lending rate by 1% on Wednesday.

By David Mugabe

Stanbic Bank on Wednesday cut its prime lending rates by 1% from 29.5% to 28.5% following a proportionate reduction of 1% by the Central Bank on its key lending rate earlier in the day.

“Effective this month, borrowing customers will see a reduction in the interest charged for both old and new borrowers,” Daniel Nsibambi, Stanbic Bank’s communications manager said on Wednesday.

The Central Bank cut its central bank rate (CBR) by 1% from 23% to 22% for February, saying it was confident inflation would slow down to single digits this year.

Bank of Uganda governor Tumusiime Mutebile on the same day sounded positive that banks would respond, especially since inflationary pressures have continued to abate.

He said the development should ease some of the pressure on traders, who have complained of a tough business environment that has not been helped by rising power tariffs.

“I hope that there will be a drop in interest rates. The reduction in CBR should help,” said Mutebile.

He was responding to a question on whether traders should expect a drop in the commercial banks’ lending rates.

Mutebile made the remarks in the Central Bank’s monthly monetary policy statement.

He said although the reduction was just 1%, BoU was satisfied with the speed of the reduction.

Most banks are expected to follow Stanbic by reducing their lending rates in the weeks ahead.

“Once there are positive indicators, banks will react immediately,” said Frans Ojielu, the managing director of the United Bank for Africa.

Crane Bank chief A.R. Kalan said they will observe the market situation and that their adjustments will depend on the supply and demand.

Although not substantial but if most commercial banks respond, it will ease some of the pain that businesses have suffered in the past few months.

Bank of Uganda increased the central borrowing rate from 13% in July to 23% in November as inflation soared to as high as 30.4%, mainly driven by a sporadic rise in food prices.

The Central Bank also revealed that the rise in interest rates, which took place during the second half of 2011, has brought about a marked declaration in the growth of bank lending.

Credit to the private sector fell from 33.8% in November 2011 to 27.8% in December.

Shilling-denominated loans also fell to 24.4% from 28.4%.

Since hitting its peak in October, the headline inflation rate released on Tuesday slowed to 25.7% in January.

Core inflation, which excludes food crops, fuel, electricity and metered water, is still at 28.1%.

Traders, under their umbrella body, the Kampala City Traders Association (KACITA), pressured the Government to rein in the banks. They complained that the high interest rates on old and new loans were forcing them out of business.

Shopkeepers in Kampala closed their businesses for several days in protest of the high interest rates charged by commercial banks. At the peak of the trader protests, Mutebile asked for time to examine the matter.

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