Weak shilling forces BoU to raise CBR to 10 per cent

Kampala. Ugandans will have to tighten their belts after Bank of Uganda confirmed high risk of inflationary pressure due to weak shilling and the rise in international oil prices.
The Central Bank yesterday responded by increasing its policy rate- the Central Bank Rate (CBR) from 9.0 per cent to 10 per cent and
The increase in CBR means higher interest rates on borrowed funds. And for that reason, as loans become more expensive, this discourages people from borrowing and spending.
People who already have loans will also have less disposable income because they spend more on interest payments and this will cajole other areas of consumption to fall. Then the economy will suffer as inflation takes a heavy toll on citizens.
The Governor, Mr Emmanuel Tumusiime-Mutebile, yesterday announced that inflation is on an upward trajectory and core inflation is projected to rise above the target of 5 per cent within the next 12 months.
Presenting the monetary policy statement for the month of October and November 2018 at the central bank headquarter, Mr Mutebile said given the objective of keeping inflation close to the target of 5 per cent and the need to maintain economic growth, a modest tightening of monetary policy stance is warranted.
“In view of the recent global and domestic developments, the BoU estimates that inflationary pressure are higher than in the previous round of forecasts. Our forecasts indicate higher inflation compared to the August 2018 round largely because the exchange rate is weaker and international oil prices are higher,” Mr Mutebile said.
Mr Mutebile added: “Consequently, core inflation is projected to rise to further in the coming months and peak in the range of 6.5 to 7.5 per cent in the second half of 2019, if the current monetary policy stance is maintained.”
In September 2018 core inflation edged up to 3.9 per cent from the previous 3.4 per cent. Mr Mutebile said core inflation is expected to fall back and stabilise at around 5 per cent in the first half of 2020, adding that the positive output gap will continue to be a key driver of inflation going forward.
The Governor stated that a key risk to inflation outlook is the shilling exchange rate, which remains vulnerable to the possibility of tighter global financial conditions as well as a stronger domestic demand.

More inflation
Mr Mutebile said the weaker shilling exchange rate combined with higher oil prices could result in a more elevated inflation trajectory.
“In addition, although food prices are projected to remain low in the forecast horizon and are not seen as a major risk to the inflation outlook, the path for food prices is uncertain as they are dependent on the weather,” Mr Mutebile said.
Although sector players have talked of a noticeable weak economy in the face of rising inflation and a weaker shilling combined with unemployment and poverty in the country, Mr Mutebile however, said economic outlook in the medium term ( two to three year ahead) remains largely unchanged since the August 2018 Monetary Policy Committee (MPC) Meeting.