Summary:
- The Bank of Uganda has raised the Central Bank Rate to 10.25% due to slight inflation decrease. Despite stabilizing efforts, risks of higher inflation persist amidst global uncertainties.
KAMPALA, (Examiner) – The Monetary Policy Committee (MPC) of the Bank of Uganda made a significant announcement on Monday, raising the Central Bank Rate (CBR) to 10.25%. This decision follows a careful analysis of inflation trends by the Uganda Bureau of Statistics for March 2024, which showed a slight dip in headline inflation to 3.3% from 3.4% in February.
According to Michael Atingi-Ego, Deputy Governor, this decrease is chiefly attributed to a decline in food crop inflation while services inflation witnessed a marginal uptick. Core inflation, however, remained stable. Despite mitigating factors like reduced aggregate demand and increasing supply, risks of elevated inflation persist.
Atingi-Ego noted that the CBR hike has helped stabilize the shilling exchange rate. Yet, the shilling remains vulnerable due to the outflow of short-term foreign investor funds and strong domestic demand by corporates, impacting domestic prices and potentially pushing inflation higher.
Inflation forecasts, adjusted downwards due to relative stability in the shilling exchange rate, still indicate a potential rise to 5.5% to 6% within the next 12 months, with a return to the medium-term target of 5% anticipated by the second half of 2025. However, upside risks persist, including geopolitical tensions, potential energy price hikes, and global financial conditions.
Moreover, while the economy maintains resilience, recent indicators suggest a slight downturn in near-term growth, with uncertainty surrounding the global economic outlook, shilling depreciation, and tight domestic financial conditions potentially dampening domestic demand.
Despite forecasting economic growth for FY 2023/24 at around 6%, with subsequent years expected to range between 5.5% to 6.5%, the Central Bank highlights potential challenges. These include the impact of rising inflation on household incomes, constraints on investment expenditure due to high raw material import costs, and the possibility of tax hikes or increased domestic financing.
Given the persistent upside risks to inflation, the MPC has decided to tighten monetary policy further to anchor inflation around the medium-term target of 5%. Consequently, the CBR has been raised by 25 basis points to 10.25%, with the bands and margins remaining unchanged.
This monetary policy stance aims to balance the containment of inflation with the support of sustainable economic growth, crucial for Uganda’s socio-economic transformation. The MPC stands ready to respond to any materialization of identified risks.
