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Why your loan repayments will stay up

By Vision Reporter

Added 10th April 2012 11:14 AM

Arthur has enjoyed reductions in his salary monthly repayments since the Central Bank started lowering its benchmark lending rate in February.

Why your loan repayments will stay up

Arthur has enjoyed reductions in his salary monthly repayments since the Central Bank started lowering its benchmark lending rate in February.

 By Samuel Sanya

Arthur has enjoyed reductions in his salary monthly repayments since the Central Bank started lowering its benchmark lending rate in February.

However, his hopes of a further cut in his repayments were shuttered on Monday when Tumusiime Mutebile, the Bank of Uganda (BOU) governor, stepped the breaks on reducing the Central Bank Rate (CBR), staying it at 21% for the second month running.
 
He cited uncertainties in the prices of oil, food and the exchange rate for his action.
 
Commercial banks have been reducing their rates by one percentage point for every similar reduction in the CBR.
 
Analysts say this is an under reaction and that the banks should have slashed their rates by at least 3% each time.
 
“Changes in the CBR take at least a month or two to filter through the economy,” said Adam Mugume, the BOU executive director for research.
 
He noted that the tight economic conditions had reduced deposits for most banks.
 
Like Arthur, the BOU’s move will keep your loan monthly repayments high as the banks will not be compelled to adjust their lending rates in line with the CBR movements as they have done in the past months.
 
BOU introduced the CRB last July at 13% to rein in runaway inflation, which hit over 30% in October, forcing commercial banks to adjust their lending rates to up 30%.
 
The move made borrowing expensive after the CBR further reached 23% in November and December.
 
BOU argued that its objective was to stop inflation from getting entrenched by putting pressure on demand for goods and services.
 
The resultant effect was the decline in credit growth and the strengthening of the shilling against the dollar.
 
The changes in the benchmark rate inspired a reduction in commercial bank prime rates from highs of 30% to an average of 26.5%.
 
While the move had worked in bringing down inflation to 27% and the shilling back to 2,400 at the close of the year, sustaining the achievements seem a toll order.
 
However, the Central Bank had also indicated that to achieve its goals, there would be a tradeoff in terms of shrinking growth rates.
 
The Uganda Bureau Statistics confirmed this recently, indicating that growth in the industrial sector fell by 12% in the second quarter of this financial year, bringing down the GDP growth by 2.3%.
 
While inflation dropped to 21% in March, the shilling is struggling to keep afloat, closing at 2,489 on Thursday.
 
The eurozone crisis that has hit exports and brought in imported inflation is projected to bring down economic growth to 4.2%, from the 6.7% recorded last year.
 
The decline in the manufacturing sector means that there were less jobs created and less money spent in the construction and manufacturing subsectors in October to December.
 
“The fall in GDP is not unexpected. There is nothing much the Bank of Uganda can do on the supply side. That is for the Government to do through fiscal policy,” said Mutebile.
 
“The only thing we can do is to provide an enabling environment for growth through the use of monetary policy. Over the past year, fiscal and monetary policies have been tight.”
 
“We seem to be approaching price levels of early last year even though prices are still high,” said Chris Mukiza, the UBOS director for macroeconomic stability.
 
“Sustainability of the fall in inflation is a policy issue. The monetary authorities have to ensure that there is a balance between dropping inflation and economic growth,” he added.
 
Despite the uncertain economic outlook, economists are optimistic that headline inflation is on its way down to single digits by the end of the year.
 
The Central Bank said in its April monetary policy statement that they will wait until inflation falls before relaxing money supply to spur economic growth.
 
Dr. Louis Kasekende, the deputy governor, said economy is set to get better with the real GDP growth picking to 5.5% in the 2012/13 fiscal year.
 
“I believe that we can now feel much more confident that inflation is firmly on a downward path since peaking in October 2011.
 
“We will only continue to ease the monetary policy stance if our inflation forecasts indicate that we can achieve our targets for reducing inflation,” he explained.
 
Approved loan applications have consistently dropped from highs of sh809b in September 2011 down to sh439b in February under the tight monetary conditions. 
 
Kasekende pointed out at a recent economic forum that the economy is bound to perform below potential resulting in lower employment and capacity utilisation than the normal long term levels.
 
“Loans to the private sector had expanded at a rate of 47% during the 12 months to September 2011, which was too rapid, but in the subsequent six months there has been no growth at all in bank lending,” he said.
 
“The BOU does not target any specific value for the exchange rate but I hope that we will be able to benefit from less exchange rate volatility than was the case last year,” he added. Kasekende explained that the Central Bank is forecasting that annual inflation will be brought down to 10% or slightly below by the end of this calendar year provided supply shortages do not resurface.
 
“We then aim to reduce inflation further to our medium term target of 5% in 2013. Achieving this path for inflation will guide our monetary policy stance during 2012 and beyond,” he noted.
 

Why your loan repayments will stay up

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