Slowing inflation during November maintains base rate at 10 pcAtingo-Ego said while the factors that have elevated inflation over the past year are reversing it would take some time before the effects flow through to prices paid by consumers.
A drop in inflation during November convinced the Bank of Uganda’s (BoU) Monetary Policy Committee (MPC) to keep the Central Bank Rate (CBR) at 10%, but the committee does concede that the inflation trend remains uncertain due to the ongoing evolution of supply shocks.
In a public statement, the Deputy BoU Governor, Michael Atingi-Ego said annual headline inflation decreased slightly from 10.7 pc in October to 10.6 pc in November 2022 while the annual core inflation declined from 8.9 pc to 8.8 pc over the same period.
“The decline is a reflection of the impact of previous monetary policy decisions plus easing annual electricity, fuel and utilities inflation, which has continued to fall after peaking at 19.6 pc in August 2022 and has since declined to 12.2 pc in November 2022. However food inflation remains elevated, edging up slightly in November 2022 to 24.1 pc from 23.5 pc in October 2022, reflecting the effects of drought. The rise in food prices is temporary and expected to fade in the coming months,” he said.
The MPC projects that inflation will continue to moderate, to an average between six to eight percent in 2023 and stabilize around the medium term target by the end of 2023.
Atingi-Ego said their latest forecast is two percentage points lower than what had been earlier projected. This is due to the dissipating impact of the earlier increases in global commodity prices, subdued domestic demand, effects of the current monetary policy stance, expected decrease in global inflation and lower exchange rate depreciation.
He said, “The Uganda shilling has been stronger than expected, appreciating by 1.6 percent in November, supported by the tightening of monetary policy, the recent decline in the global commodity prices such as crude oil which somewhat eased the pressure on deteriorating terms of trade, increase in remittances and foreign direct investment in the oil sector.”
Atingo-Ego said while the factors that have elevated inflation over the past year are reversing, it would take some time before the effects flow through to prices paid by consumers. In the meantime, the upside risks include a potential increase in international commodity prices beyond current forecasts due to the possible effects of capping the price of Russian oil, Europe’s ban on Russian crude imports and further cuts in in global crude oil production and exports.
Besides the persistence supply and logistical constraints to production, other factors are higher shilling depreciation due to simultaneous tightening of monetary policies by major central banks that could lead to adverse effects on Uganda’s exports earnings and the impact of tighter global financial conditions and declining international reserves.
Bad weather in the coming seasons which could damage crop and increase food prices is another upside risk. However Atingo-Ego said Uganda’s economy remains largely resilient to the current external shocks and is projected to grow in the range of five to 5.3 pc in FY2022/23 from 4.7 pc in FY2021/22.
“This is driven by improvement in agricultural productivity as a result of government interventions, investments in the oil sector, and a rebound in industrial activity,” he said.
By keeping the CBR at 10 pc, it will allow the MPC time to assess the evolving economic outlook. The band on the CBR remains at +/-2 percentage points while the margins for the rediscount and bank rates will remain at three and four percentage points. The rediscount and bank rates will remain at 13 pc and 14 pc respectively. Atingo-Ego said any adjustments to the monetary policy stance will continue to be determined by the incoming data and in a measured gradual manner, ensuring that monetary policy remains supportive of sustainable economic growth in an environment of price stability.