Analysts see relaxed Uganda monetary stance holding through 2016

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KAMPALA, JUNE 14 – The Bank of Uganda’s policy rate announced on Monday supports analysts expectations […]

KAMPALA, JUNE 14 – The Bank of Uganda’s policy rate announced on Monday supports analysts expectations that Uganda will maintain a softer policy stance over the next  few months as it seeks convergence with a fiscal policy that seeks to inject more liquidity into the economy.

For the second time this year, the central bank this week reduced its policy rate by 100 basis points bringing it down to 15 percent. The reduction followed a similar move in April when the rate climbed down from its earlier peak of 17 percent. The bank maintained the bad on the CBR at +/-3 percentage points. The rediscount rate and the bank rate were also reduced to 19 percent and 20 percent, respectively.

Analysts had predicted earlier that prevailing conditions pointed to a looser monetary policy for the rest of the year on the back of the need to jumpstart a stalled economy and the absence of near-term threats to economic stability.

“The economy continues to grow at a moderate pace, and is projected to expand by 4.6 percent in Financial Year (FY) 2015/16, down from an earlier projection of 5.0 percent.  The downward revision reflects the adverse impact of the weak external economic environment, soft commodity prices, tight financial conditions, and subdued domestic demand. Going forward, economic activity is expected to improve with domestic demand being the key contributor to economic growth amidst continued weakness in the external sector,” Bank of Uganda Governor Emmanuel Tumusiime-Mutebile said during as he announced the reduction.

Anticipating the central bank’s rate decision during the Stanbic Bank post-budget breakfast  last Friday,  Stanbic Bank’s Economist for East Africa Jibran Qureishi  told 256BN that he expected  a more relaxed monetary stance  for the rest of the year despite a temporary spike in inflation last month.

“Despite the rate of headline inflation rising to 5.4 percent last month and core inflation to 7 percent, we don’t see any threat of underlying inflationary pressures. Aggregate demand remains suppressed, the currency remains pretty stable; there could be some lag effects from the Uganda shilling’s weakness last year but I don’t think it is drastic and hysterical to prompt the central bank to start tightening its policy stance again,” he said.

Both the central bank and analysts project inflation to return to the 5 percent target by the end of the year barring a rise in oil prices or food crop failure.

Low oil prices have helped Uganda keep its current account deficit at about 50percent despite the collapse in commodity prices and export revenues.

“Bank of Uganda is cognisant of the fact that demand pressures on inflation remain subdued, and indications are that domestic demand is likely to remain constrained at least in the remaining part of 2016. Given that inflation is forecast to fall back to the policy target of 5 percent over the next 12 months, BoU believes that there is scope to continue easing monetary policy,”  Mutebile said.

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