Economy still faces several risks, says BoU

Bank of Uganda (BoU) has warned that there still exist risks such as geopolitical tensions, which could push up energy prices and freight costs, resulting in higher inflation in Uganda.

Inflation has decelerated but Bank of Uganda noted in its Monetary Policy Report that the above and other risks such as ongoing global developments, which could result in depreciation of the shilling, extreme weather and an increase in seasonal consumptive activity could create inflationary pressures.

However, despite the risks, Bank of Uganda reduced the Central Bank Rate (CBR) to 9.75 percent from 10 percent to influence a cut in lending rates that currently stand at above 18 percent.

While presenting the October Monetary Policy Report, Dr Michael Atingi-Ego, the Bank of Uganda deputy governor, said the Central Bank had assessed that inflation will remain below the 5 percent target in the near term, given that risks were balanced but tilted towards inherent uncertainty. 

“Easing of monetary policy is necessary to keep inflation on track while supporting social-economic transformation. Any additional changes to the policy rate will continue to rely upon the incoming data and evolving assessment of risks,” he said, noting that the inflation outlook remains subdued, due to unwinding of global shocks and a stable shilling exchange rate partly due to steady coffee export receipts, moderate import growth, prudent monetary policy that balanced economic growth recovery and maintaining price stability.

Bank of Uganda has remained cautious in lowering the policy rate due to both internal and external risks.

The Central Bank also noted that gross domestic product for the period ended June had remained strong, with an annual quarterly real growth of 6.6 percent due to strategic government interventions, an increase in foreign direct investment in the extractive industry, and the commencement of oil production in the 2025/26 financial year. 

However, Dr Atingi-Ego said that intensified geopolitical tensions could generate further economic shocks through disruption of trade and supply chains, leading to higher commodity prices, especially oil. 

“Elevated trade restrictions and debt levels in many countries could add significant inflationary pressure to the world economy, generating tighter financial conditions for Uganda and domestic financial conditions could remain tight, resulting in higher borrowing costs and, subsequently, private sector credit growth remaining sluggish. Higher domestic borrowing to finance fiscal deficits could crowd out the private sector and exacerbate the already constrained private sector credit,” he said. 

The exchange rate has remained relatively stable with a bias towards appreciation. In September, the shilling appreciated against the dollar by 0.3 percent compared to a depreciation of 0.5 percent in August, due to inflows from coffee export receipts, non-governmental organisation and remittances.