Uganda’s central bank has maintained its benchmark policy rate at nine per cent in a bid to spur credit growth.  

Analysts say relatively low inflation, stable currency, and signs of improving borrower appetite could be the basis for the decision.

The central bank rate (CBR) has been unchanged since April this year to boost credit growth and keep inflation below the five per cent target, according to the Bank of Uganda (BoU).

Headline inflation rose to 3.1 per cent in July from 2.1 per cent in June while the core inflation stood at 2.5 per cent in July, from 0.8 per cent in June. BoU forecasts that the core inflation will continue to rise to a peak 6 to 7 per cent in the second half of the financial year 2018/19 before stabilising around the medium-term target of 5 per cent by end of 2019.

The shilling has recovered from a record low of Ush4,000 last month against the US dollar. The shilling closed the day on Monday at Ush3,750 against the greenback following the policy rate announcement.

“We experienced some inflation shocks in July caused by fuel price increases and the introduction of the Over the Top (OTT) tax on data bundles. As a result of the OTT tax, inflation in the communications basket jumped to 20 per cent in July. But after exclusion of these one-off factors, we do not see inflation exceeding seven per cent in the medium-term,” said Dr Adam Mugume, BoU’s executive director for research.

“There are significant global political and trade risks that have affected many leading currencies. For this reason, the Bank of England and the Central Bank of Canada have tightened their key policy rates of late in order to contain those risks. Faced with these circumstances, we believe the Uganda shilling might remain volatile in the near future but our foreign currency reserves are sufficient to counter additional shocks,” Mr Mugume added.

In a signal of the impact of the decision to ease the cost of borrowing since February 2016, the central bank said there has been significant loan uptake from commercial banks along with declines in the lending rates.

“Weighted average lending rates fell to 17.7 per cent at the end of June compared to 25.2 per cent registered in February 2016,” BoU said.

Total credit disbursements recorded in the banking industry amounted to Ush1.37 trillion ($366 million) at the end of June this year.

“At 3.1 per cent, inflation is still below the BoU target rate of 5 per cent despite an increase recorded in headline inflation last month. The local currency has also stabilised in the Ush3,700 range against the US dollar after hitting a record lows of above Ush3,900 experienced in June 2018. Given that there are no major risks to inflation in the immediate future, it is not surprising that BoU maintained its benchmark policy rate at nine per cent,” said David Arthur Wandera, Head of Markets at Barclays Bank Uganda.

However, there is cautious optimism on faster credit growth owing to recent increases recorded in yields earned on treasury bills and bonds- a key pricing tool for loans offered to customers.

Yields earned on treasury bills recently rose to a range of 10-14 per cent compared to 8-9 per cent registered at the beginning of this year, according to financial market reports.