Central Bank Rate Maintained at 6.5% amidst Slow Third Quarter

The Bank of Uganda (BoU) has maintained the Central Bank Rate (CBR) at 6.5 percent, citing slow economic activity in the second quarter and “a persistence of high uncertainty”.

According to the August Monetary Policy Statement, economic growth is expected to noticeably slow down in the quarter to September due to the pandemic containment measures.

The Monetary Policy Committee (MPC) “assessed that the risks to the economic growth outlook are still on the downside, that there remains considerable excess capacity in the economy, and that there is a persistence of high uncertainty,” reads the statement.

“Against this backdrop, the MPC judged that keeping CBR unchanged at 6.5 percent would be consistent with meeting the inflation target of 5 percent sustainably in the medium term,” adds the statement.

“The band on the CBR is also maintained at +/-2 percentage points on the CBR and the margins on the rediscount rate and bank rate have been kept unchanged at 3 and 4 percentage points on the CBR, respectively.”

The Central Bank Governor Prof. Emmanuel Tumusiime-Mutebile said that high-frequency indicators of economic activity indicate that the momentum of economic activity for the quarter to July 2021 subsided.

He noted that the current Covid-19 restrictive measures will continue to weigh on economic activity, with growth projected in the range of 3.5-4% in Financial Year (FY) 2021/22.

“In particular, between Covid-19 stops and starts, tourism is unlikely to return to normal levels any time soon. However, if vaccination picks up in the latter part of the year and movement restrictions are eased, this will allow for gradual economic growth recovery,” the governor said.

“Nonetheless, the lingering impact of the pandemic on private sector finances is expected to weigh on output over the next two years.”

The committee noted that economic growth might return to 6-7% in FY2024/25, indicating that the economic activity is expected to remain well below the pre-pandemic path for an extended time.

“A rebound of economic activity will be sustained by an acceleration in private consumption due to pent-up demand and strong growth in external demand which should contribute to a solid pickup in exports,” the committee observed.

“In addition, a gradual return of tourism, the Final Investment Decision (FID) in the oil sector and broad-based improvements in business confidence should also provide support to growth.”

The governor noted that when the BoU Credit Relief Measures (CRMs) expire on September 30, the central bank will, on a case-by-case basis, put in place policy interventions for those sectors that remain under lockdown.

“Furthermore, in order to ensure financial stability as the CRMs expire, BoU has maintained the COVID-19 Liquidity Assistance program (CLAP).” I