Bank of Uganda likely to keep rate unchanged

In Summary

June 12—The business community is wondering whether Bank of Uganda will stay the course and support […]

June 12—The business community is wondering whether Bank of Uganda will stay the course and support lower borrowing costs when the Monetary Policy Committee reveals its latest assessment for the Central Bank Rate (CBR) this Thursday.

At present the CBR stands at 11% and the betting is BoU will leave it unchanged in the wake of the expected spike in government spending under the new budget. However, most economists interviewed by 256BN do not see a hike.

“It will send a wrong message if the central bank raises the rate. Business had a very hard time last year and needs a break. Add to that, the government is desperate to get the economy up and running again. That cannot happen unless borrowing costs come down,” an analyst with one the leading commercial banks told 256BN.

Last month Emmanuel Tumusiime Mutebile, the BoU Governor told the Uganda Bankers Association, “I believe that we should have scope to implement further modest reductions in the CBR in the near future, although again I want to stress the caveat that any further reductions are contingent on there being no worsening of the core inflation forecast.”

It is the CBR that most financial institutions use as a benchmark to determine their own prime rates. Currently, Stanbic Bank Uganda is posting the lowest at 19.5%, with Bank of India at 20%;  Barclays at 20.25%; Ecobank at 20.5% and United Bank of Africa (Uganda) at 20%. NC Bank charges the highest at 25%. The CBR is also intended to guide short-term inter-bank lending rates and consequently influence the marginal cost of funds for commercial banks.

In April,  BoU cut the CBR by 0.5 percentage points to 11% , citing falling inflation levels, but last month headline inflation went up to 7.2% from 6.8%. On the other hand  the annual core inflation, which strips out food, fuel, metered water and electricity prices, rose to 5.1 percent from 4.9 percent in April. It is core inflation that influences the central bank decisions on the CBR movement.

Adopted in 2011, the BoU inflation-targeting policy is focused on reining in annual core inflation to 5 percent. Emmanuel Tumusiime Mutebile, the BoU Governor said in April given that core inflation is forecast to remain around the medium term target of five percent and in line with efforts to support private sector credit and economic growth momentum, BoU believes that there is scope to continue easing monetary policy.

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