On 7 August 2024, the Bank of Uganda’s Monetary Policy Committee (MPC) reduced the Central Bank Rate (CBR) by 25 basis points to 10.0%.
According to the bank, in the twelve months to July 2024, domestic inflation remained moderate, with the annual headline and core inflation averaging 3.2% and 3.0%, respectively, below the medium-term policy target of 5%.
“This is due to the fading impacts of global shocks like the war in Ukraine and COVID-19, the tightening of monetary policy early this year and the exchange rate that has stabilised with a bias towards appreciation since March 2024,” said Michael Atingi-Ego, the Deputy Governor, in a Monetary Policy Statement for August 2024.
“The relative stability of the shilling against the US dollar has benefited from the recent CBR increases and inflows from coffee exports owing to favourable international coffee prices.”
Nonetheless, Atingi-Ego said both annual headline and core inflation edged up slightly to 4.0% in July 2024 from 3.9% and 3.8% in June 2024, respectively. The increase in inflation was largely driven by services inflation which increased to 6.5% in July 2024 from 6.1% in June 2024, due to the increases in passenger transport, accommodation, recreation, sports, and culture services inflation.
“Looking forward, the Bank of Uganda (BOU) expects inflation to be below the 5% target in FY 2024/25, broadly reflecting stable demand conditions, lower imported inflation and exchange rate stability.”
He noted that the inflation projection has been revised slightly downwards relative to the June 2024 forecast round, largely due to a lesser depreciated shilling exchange rate.
“However, we expect inflation to continue rising moderately in the next four months due to seasonal factors but stabilise around the target of 5% by the first quarter of 2025. There are, however, persistent uncertainties around the inflation projection, including the effects of a possible escalation of the ongoing geopolitical tensions in the Middle East, potential energy price hikes, unfavourable weather patterns affecting food production, and a stronger-than-expected path for domestic demand.”
In addition, the signs of lingering inflation in other parts of the world and heightened volatility in both capital flows and the exchange rate could result in stronger depreciation of the shilling exchange rate and, therefore, higher inflation than currently assumed.
Conversely, the continued unwinding of the past shocks to energy and other imported goods prices may moderate inflation. The risks around the projection for inflation are judged to be balanced.
According to Atingi-Ego, economic growth has recovered from the recent slowdown which had been occasioned by several external shocks. GDP growth picked up in the last two quarters of FY 2023/24, with an average growth of 6.7% year-on-year compared to a growth of 5.3% in the first two quarters of the financial year. The pickup in growth was broad-based across all sectors.
“There are signs that the continued recovery in real incomes and rising confidence are beginning to pass through to stronger consumption despite the tight monetary policy.” He said economic growth for FY 2024/25 is projected between 6.0% and 6.5%.
“Over the medium term, economic growth is projected to be above 7%, supported by stronger private sector investment and government intervention, especially in agriculture and global economic growth recovery.”
