The Bank of Uganda expects inflation to go up at a slower pace in the coming months due to a stronger currency and new estimates for consumption demand, which show reduced pressure on consumer prices.

Emmanuel Tumusiime-Mutebile, the BoU Governor, said on Thursday that the forecast for core inflation — which does not include prices of foodstuffs and fuel — has improved and that a lower inflation rate was projected.

He said that risks, which create pressure on the pace at which prices of basic consumer products rise, have reduced.

“The change in inflation forecast is mainly because household demand is weaker than previously estimated, which is likely to dampen demand side pressures on consumer prices. Secondly, the shilling has appreciated more than previously forecast, which dampens pressure on prices of imported goods,” said Prof Tumusiime-Mutebile.

He said that the central bank forecasts that core inflation will stabilise around its medium-term target of five per cent over the next 12 months.

BoU cut its benchmark policy rate — the Central Bank Rate — by one percentage point to 11 per cent, indicating that it has confidence in its projections, a move that could potentially bring down overall interest rates and spur economic growth.

Mixed feelings

The rate cut, however, generated mixed feelings in the market, with analysts pointing to a self-defeating outcome.

“The rate cut is quite confusing. The government on one hand has been borrowing feverishly and this has pushed yields on treasury bonds to 15 per cent while the CBR has been slashed to 11 per cent. What would you expect of a commercial bank faced with a Treasury hungry for money and an ordinary borrower seeking a new loan?” argued an analyst at Standard Chartered Bank Uganda.

A central bank will typically cut the benchmark policy rate to indicate that it is either pushing for lower interest rates, which increase the demand for credit, or it is pushing for higher interest rates that have the effect of slowing down economic growth and taming a rising inflation rate.

The Uganda Bureau of Statistics said that, in May, headline inflation — which includes all items that are used to track the cost of living — rose to 3.6 per cent from 3.4 per cent while core inflation declined to 5.6 per cent from 5.8 per cent.

BoU is expecting growth in the local economy to be the main driver, with exports expected to contribute marginally.

“In 2013/14, it is unlikely that net export demand will continue to be the primary source of growth for the economy and consequently, domestic demand will have to make a larger contribution to the growth of output,” said Prof Tumusiime-Mutebile.

He said that although there are expectations of growth in investments from the public and private sectors, household consumer spending will be the main driver of growth in the coming year, and this will be supported by credit growth.

The Bank forecasts economic growth at 6.7 per cent in the next financial year and a projected growth of 5.3 per cent in the current one.

“We had projected average monthly credit growth of about 15 per cent this financial year, but we recorded eight per cent,” said Jacob Opolot, BOU’s director for research.