Bank of Uganda (BoU) has announced it has taken a decision to increase the Central Bank Rate (CBR), to counter the rapidly increasing inflation.
This decision, according to BoU was taken yesterday, in a Monetary Policy Committee (MPC) meeting of June 2022, and it was resolved that the CBR be increased by 1% to 7.5%.
A bank rate refers to the interest rate at which a nation’s central bank lends money to domestic banks, often in the form of very short-term loans. Increasing the rate is majority intended to stabilize the economy.
BoU affirmed it will keep adjusting the CBR, until when it is certain that all threats to the economy like inflation are permanently contained.
The rate has been at 6.5% since June 2021, after the Central Bank seemed to have kept inflation at bay, below the 5% target.
In its Monetary Policy Committee statement released yesterday, BoU, said that risks ahead have motivated a revision in the CBR to contain demand pressures amid increasing demand, versus subdued supply, even as the inflatory pressure is likely to be short lived.
According to the statement, inflation has rapidly risen, increasing to 6.3 % and 5.1% in May 2022, from 2.7% and 2.3% in January 2022 respectively.
Later during the course of the day, the same statement was addressed to the press by the Deputy Governor BoU Dr. Michael Ating-Ego.
He said the price of essential commodities such as cooking oil, soap, food, fuel and transportation had risen sharply, creating supply versus demand imbalances, occasioned by Covid-19, and worsened by Russia-Ukraine war.
“The weakening of the shilling against the dollar coupled with rising food and energy prices have worsened the inflation outlook since April. High business costs are likely to spread to consumer prices, thereby pushing inflation higher in the coming months,” Ating Ego said.
As a result, the annual headline and core inflation are now forecast to average to 7% and 6.1%, in 2022, which is higher than earlier projections, a view shared by Dr. Ating Ego.
According to the BoU, inflation is projected to peak in the second quarter of 2023, before gradually declining to stabilize around the medium-term target of 5% by mid-2024.
The statement further notes that main upside risk, include global inflationary pressure amid persistently higher world food and energy prices, which are likely to escalate in the period ahead, further rendering the Shilling very weak.
Worse still according to BoU, higher prices in the global markets would further increase the demand for foreign exchange in particular a USD required to purchase the same quality of goods, and this could further weaken the exchange rate.
BoU also noted that weaker domestic demands are likely to squeeze consumer incomes, which will constrain investments, and on a sad note, optimism for post COVID-19 economic recovery is shrouded in mystery, due to uncertainties created by the Russia-Ukraine military standoff.
In a nutshell, he said that the economic growth outlook is projected in the range of 4.5-5% in 2022, which is lower than the previous projections of 5.5-6% as of April.
The Central Bank said risks to growth outlook, which are tilted downwards include, weaker global growth, escalation of geopolitical conflicts, persistent global supply chain disruptions, heightened global economic uncertainty and higher inflation.
This, Dr Atingi-Ego said, has watered down consumer confidence, heightened exchange rate volatility and prolonged weak growth in private sector credit.
On a positive note, he supplied a ray of hope, by noting that in the medium-term, the economy is expected to grow between 6% and 7%, aided by rapid investments in the oil sector, which will either be public or private oriented.
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