The Bank of Uganda (BoU) has raised the Central Bank Rate (CBR) by 1 percentage point to 7.5 percent from 6.5 percent following a Monetary Policy Committee (MPC) meeting of June 2022.
This is the first time it has raised the CBR since 2018.
According to the Deputy Governor BoU, Michael Atingi-Ego, the MPC raised the CBR to 7.5 percent and maintained the band on the CBR at +/- 2 percentage points, where the margins on the CBR for the rediscount and bank rates remain at 3 percentage points and 4 percentage points, respectively.
Consequently, the rediscount and bank rates are now 10.5 percent and 11.5 percent, respectively.
He noted that BoU will continue to raise the CBR until inflation is firmly contained around the medium-term target.
He further revealed that inflation is increasing rapidly and spreading broadly across the basket of consumer goods and services.
According to him, the annual headline and core inflation rose to 6.3 percent and 5.1 percent in May 2022 from 2.7 percent and 2.3 percent in January 2022, respectively.
Atingi-Ego said the weakening of the Uganda shilling against the US dollar coupled with rising food and and energy prices have worsened the inflation outlook since the April 2022 forecast round.
“The prices of essential commodities such as cooking oil and soap, food, fuel and transportation, have risen sharply. Supply and demand imbalances that were caused by the Covid-19 pandemic and heightened by the Russia-Ukraine conflict are the main underlying sources of broader price pressures,” he said.
He said the higher business costs are likely to spread into consumer prices thereby pushing inflation higher in the coming months.
Consequently, annual headline and core inflation are now forecast to average 7 percent and 6.1 percent, respectively, in 2022, which is higher than earlier projections.
Inflation is projected to peak in the second quarter of 2023 before gradually declining to stabilise around the medium-term target of 5 percent by mid-2024.
He attributed most of the inflation outlook to Global Inflationary Pressures amidst persistently higher world food and energy prices.
“The inflation outlook is significantly uncertain, with the balance of risks tilted to the upside. The main upside risks include global inflationary pressures amidst persistently higher world food and energy prices. The Russian-Ukraine conflict continues to strain supply chains and stoke international commodity prices.”
He added: “A stronger tightening of monetary conditions by advanced economies aiming to control inflation could intensify portfolio outflows from frontier markets like Uganda, thereby further weakening the shilling exchange rate. Higher prices in the global markets that would further increase the demand for foreign exchange (US$ in particular) required to purchase the same quantity of goods, could further weaken the exchange rate.”
The Deputy Governor also alluded to the trade restrictions by some countries and stringent containment measures against new Covid-19 virus strains in Asia, saying these are worsening the disruptions to global supply chains.
These have caused downside risks which include much weaker domestic demand as higher inflation squeezes consumers’ real incomes together with tighter financial conditions, which will constrain investment.
Bumper food crop harvests could lead to lower food prices, he noted.
The adverse global economic developments and higher inflation have diminished the prospects for domestic economic growth.
Economic growth is now projected in the range of 4.5 – 5.0 percent in 2022 which is lower than the previous projection of 5.5-6.0 percent as of April 2022.
Weaker external demand coupled with surging commodity prices and the resultant high domestic inflation will lead to tighter monetary conditions thereby constraining aggregate demand.
He added that the risks to the growth outlook, which are tilted to the downside include; weaker global growth, escalation of geopolitical conflicts, persistent global supply chain disruptions, heightened global economic uncertainty, and higher inflation.
“These downside risks are dampening consumer confidence, heightening exchange rate volatility, and prolonging weak growth in private sector credit. Nonetheless, in the medium-term, the economy will grow at 6-7 percent supported by public and private investments in the oil sector,” noted Atingi-Ego.
“While the inflationary pressures are likely to be temporary, the worsening economic outlook, uncertainty, and risks ahead motivated the MPC to tighten monetary policy to contain demand pressures until supply catches up.”
BoU will phase out the remaining targeted credit relief measures for the education and hospitality sectors on 30 September 2022.