Central Bank Cuts Interest Rate by 0.5%, Citing ‘High Degree of Uncertainty’
The Bank of Uganda reduced the Central Bank Rate (CBR) by 0.5 percentage point to 6.5 percent, citing a “high degree of uncertainty” that “surrounds the economic outlook, with many possible upside and downside risks”.
During the June 2021 Monetary Policy Committee (MPC) meeting, officials observed that the resurgence of the Covid-19 pandemic poses a high risk, which could dent domestic demand, especially in the sectors that are contact intensive.
“In addition, there is little space for a fiscal stimulus package to respond to the fragile economic growth and the rising public debt necessitates fiscal consolidation to keep public debt on a firm downward path,” Prof. Tumusiime Mutebile, the Bank’s governor, said in a June 17 statement.
“Furthermore, a sizable share of domestic debt held by non-resident investors makes the domestic financial market an important transmitter of external financial shocks to economic growth in the event of intensified global financial volatility,” he went on.
“Additionally, private sector credit growth slackened in March-April 2021, and in the months ahead the growth of private sector credit could be unduly deterred by higher non-performing loans (NPLs), as forbearance periods come to an end and the real impact of the Covid-19 pandemic on businesses and individuals becomes clearer.”
According to the governor, materialization of such developments would substantially slow economic recovery.
High-frequency indicators of economic activity show that the momentum of economic activity for the quarter to May 2021 was moderate.
The Uganda Bureau of Statistics in its June 2021 real GDP estimates, noted economic growth of 3.3 percent in Financial Year (FY) 2020/21, slightly higher than initial projections of 3.1 percent, owing primarily to stronger household consumption.
However, contraction in private sector investment is persisting, partly reflecting heightened Covid-19 induced uncertainties.
The real GDP growth outlook remains unchanged at 4.0-4.5 percent in FY2021/22.
According to the statement, economic recovery is expected to strengthen, with above-trend economic growth in the outer years as vaccine effectiveness increases, which should allow relaxing the current public health measures and a stronger rebound in domestic demand.
Prof. Mutebile also noted that moderate growth in domestic demand is expected over the forecast horizon and the strengthening global recovery is generally supportive of economic growth.
“Moreover, the vaccination process is expected to gather steam in the coming months, which should help to normalise economic activity quickly,” he said.
The governor says the economic recovery continues to require monetary policy support until economic slack is absorbed so that the 5 percent inflation target is sustainably achieved.
“Against this backdrop, the MPC decided to reduce the CBR to 6.5 percent and maintained the band on the CBR at +/-2 percentage points on the CBR,” he said.
“The margin on the rediscount rate and bank rate has been kept unchanged at 3 and 4 percentage points on the CBR, respectively. Consequently, the rediscount rate and the bank rate have been reduced to 9.5 percent and 10.5 percent, respectively.”
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