![](/resource/blob/4666700/a6945e4958444bd4877951e89e0104f8/home04pix-data.jpg)
Bank of Uganda offices in Kampala.
Although the Bank of Uganda (BoU) on August 7 joined other central banks in the advanced economies to cut policy rates, it doesn’t mean that commercial banks are going to lower commercial lending rates soon for the borrowers beginning borrowing at lower interest rates.
This is because the central bank policy rate (CBR) cut comes with time lag since the commercial banks take time to reduce their lending rates even when policy rates have been reduced.
BoU Monetary Policy Committee (MPC) cut the central bank rate by 25 basis points from 10.25 percent to 10.0 percent, expecting a slower inflation increase.
But policy rate still remains in double digits which implies it’s relatively high to influence quick reduction in the interest rates by commercial banks.
On Thursday, economist Dr Fred Muhumuza told Monitor that the central bank policy change is “too little a change to make an impact.”
He added: ‘It’s still very high and likely to be undermined by a big appetite to issue government bonds and TBs (Treasury Bills).”
While presenting the Monetary Policy statement on August 7 at the central bank, Bank of Uganda Deputy Governor Dr Michael Atingi-Ego said the MPC noted that although risks of higher inflation remain, the adverse impact from past external shocks has abated with some progress in moderating risks of inflation persistence.
“Therefore, it was appropriate to reduce slightly the degree of monetary restrictiveness,” he emphasized.
However, Dr Atingi-Ego was quick to state that given the balance of risks, the MPC noted that a cautious easing of monetary policy is warranted in support of the objectives of containing inflation around the 5 percent policy target and economic growth to levels consistent with socio-economic transformation.
“Going forward, BoU will adjust its policy stance informed by incoming economic data, with a view to maintain a low and stable inflation environment, which is necessary for sustainable economic growth,” he explained.
![](/resource/blob/4520268/135e51188e803b99302b32d6a43bc65c/home02pixx-data.jpg)
Michael Atingi-Ego, the deputy governor of the Bank of Uganda. PHOTO/FILE
Dr Atingi-Ego said 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 FY2023/24, with an average growth of 6.7 percent year-on year compared to a growth 5.3 percent in the first two quarters of the financial year. The pickup in growth was broad-based across all sectors.
“The high-frequency indicators of economic activity indicate improvement in business conditions, as shown by the sustained expansions in output and new orders,” he said.
Uganda’s economic growth for FY2024/25 is projected between 6.0 percent and 6.5 percent.
Over the medium term, economic growth is projected to be above 7 percent, supported by strong private sector investment and government intervention, especially in agriculture and global economic growth recovery.
However, on the other hand, the central bank stated that there are vulnerabilities to the growth outlook saying internationally there remains the continuing risk of higher commodity prices and disruption to trade flows associated with developments in the Middle East and other significant geopolitical uncertainties, which could lead to weaker global economic activity and stronger inflationary pressures.
Another economist, Prof Augustus Nuwagaba toldMonitor that when CBR is reduced, the signal is aimed at enhancing private sector credit, which results in increased money supply.
“The ultimate aim is to enhance business enterprise development. However, the cost of doing business remains high in the form of unfriendly tax regime, with high and multiple taxes as well as exchange rate volatility with risks tilted to the upward, culminating in depreciation of the shilling,” he said.
He added: “The most robust tool should be enhancing export sector performance, reducing cost of doing business which attracts both domestic and foreign direct investment that accelerates aggregate demand and boosts business enterprises, hence, creating employment.”
![](/resource/blob/1756782/ca0bed9d329b49be74d5d98e1674715c/comm02pix-data.jpg)
Augustus Nuwagaba
In the monetary policy statement, the Bank of Uganda reported that the re-emergence of protectionist policies could add pressure on international trading system and weigh on domestic growth through lower exports of goods and services.
Dr Atingi-Ego cautioned that economic growth could also be lower if the growth in private sector credit slows further due to higher costs of borrowing and higher domestic borrowing by government.
“Additionally, a stronger shilling depreciation could weigh down on domestic demand since capital and other international goods account for about 75 percent of imports. On a positive note, more favourable weather conditions leading to good food crop harvest, higher government and private sector investment in the extractive industry, and effective government intervention programs could boost economic activity,” he said.
“Furthermore, if the world economy grows more strongly than currently projected, rising net exports would boost domestic growth than expected. The risks to this forecast are assessed as broadly balanced,” he added.
While presenting the International Monetary Fund (IMF) updated World Economic Outlook (WEO) on July 16, 2024 in Washington, DC, IMF chief economist Prof Pierre-Olivier Gourinchas said global growth is projected to be in line with the April 2024 WEO forecast, at 3.2 percent in 2024 and 3.3 percent in 2025.
At the global level the European Central Bank (ECB) cut its policy rates by 25 basis points to 3.75 percent after five years joining the other central banks like Canada, Sweden and Switzerland. On August 1 the Bank of England cut its policy rates by a quarter percentage basis points (25) from 5.25 to 5 percent, the World is now looking at the Federal Bank of the United States of America which is expected to cut its policy rates during its September meeting this year.