Central Bank keeps lending rate at 10%

Presenting the Monetary Policy Statement for the month of February 2023, the Deputy Governor BoU, Mr Michael Atingi-Ego, said the Bank of Uganda will continuously review the monetary policy stance against new information and stands ready to respond appropriately to ensure that inflation is brought back sustainably to the 5 percent medium-term target.

Uganda’s annual headline inflation increased to 10.4 percent in January 2023 from 10.2 percent and annual core inflation increased from 8.4 percent to 9 percent. However, the BoU said the increase in inflation is expected to be short-lived.    

“Inflation is expected to continue declining in the months ahead due to lower energy prices, improved global supply chains, exchange rate stability supported by tight monetary conditions, and moderate demand pressures due to tight monetary and fiscal policies, core inflation is expected to average 6.5 percent and 5.6 percent respectively in 2023, but will return to the five percent target by the end of 2023,” he said. 

Risk factors

Nevertheless, Mr Atingi-Ego said the inflation outlook is surrounded by some risks, adding that the upside risks include the impact of international financial conditions on the shilling exchange rate, and slower adjustment in domestic demand due to tight monetary and fiscal policies.

The others factors he said are higher food crop prices due to unfavourable weather, faster global economic recovery and a possible increase in global energy prices, and a resurgence of supply chain distortions due to heightening geopolitical tensions.

On the downside risk to the inflation, he said they include bumper food crop harvest due to good weather, lower than expected global growth due to high interest rates, faster decline in international commodity prices and lower domestic demand due to declining real incomes.  

“Overall, the balance of risks to the inflation outlook is tilted downwards,” he summed up.

Giving recap on Gross Domestic Product (GDP) growth, he said the latest quarterly GDP data from the Uganda Bureau of Statics (Ubos) revealed stronger than expected economic growth in the three quarters of 2022, averaging 6 percent. 

Service sector
A stronger industrial and service output growth more than offset a decline in growth of the agricultural sector.
“Similarly, the Composite Index Activity (CIEA), a high-frequency indicator of activity, points to a 1.5 percent growth in the second quarter of the FY2022/23, up from 0.3 percent in the previous quarter. Also, business sentiments have improved since the MPC meeting of December 2022,” he said.

The BoU projects economic growth in the range of 5.0 to 5.6 percent in the FY 2022/2023. Increased external demand for exports, a significant rebound in the foreign direct and private investment, which is reflected in strong growth in the quarterly industry and services output, and better supply chain conditions, are expected to support modestly higher economic growth in the near term, firming further in the outer years.

However, the BoU said economic growth is projected to remain below its long-term trend until FY 2025/2026.
“Moreover, the growth outlook is subject to downside risks, including lower-than-expected global growth, lower commodity prices, unfavourable weather conditions, a resurgence of supply chain distortions due to potential escalation of geopolitical tensions, and the risk of higher domestic inflation, which would necessitate further monetary policy tightening,” Mr Atingi-Ego said.

Maintaining the CBR at 10 percent signifies that the Central Bank is still executing a tight monetary policy stance in the economy.   

In its staff appraisal of January17, accompanying policy discussion with the Uganda government authorities, the International Monetary Fund (IMF staff) said: “Tightening the monetary policy stance will ensure that inflation returns to target in the medium term. Continued exchange rate flexibility will reinforce the effects of fiscal and monetary tightening and rein in the current account deficit by bringing domestic absorption more in line with production.”

Domestic absorption
The IMF staff said tight macro policies and continued exchange rate flexibility will help strengthen external buffers. Fiscal consolidation and monetary tightening are essential to bring overall domestic absorption more in line with domestic production, reduce the current account deficit, and contain the decline in reserves.

“Over the medium-term, growth is assumed to return to its pre-pandemic trend of 6 to 7 percent, predicated on governance reforms boosting confidence and private investment, development of the oil sector, and more efficient and productive government spending,” the IMF staff said.

About the talk of global economic recession negatively impacting Uganda’s economy, the executive director of research at BoU, Mr Adam Mugume, ruled out that the fear of global recession, saying the US economy and other advanced economies are registering positive growth.

“Even if the US economy were to go into recession, it would not have much impact on Uganda’s economy because 50 percent of Uganda’s export is within the East African Community region,” he said.

The deputy governor added that economic recession occurs when the country registers two consecutive negative growth and there are no signs that the United States economy is heading for a recession.