Uganda’s central bank has kept the key policy rate unchanged at seven percent, a stance described by analysts as “cautious and guarded” amid a looming rise in inflation following the easing of lockdown restrictions.
The Bank of Uganda (BoU) noted a slight improvement in both foreign and domestic demand which, along with the easing of the lockdown and a stable exchange rate, are supporting economic growth recovery.
But, the regulator warned that the “economic outlook is extremely uncertain”, largely due to the Covid-19 pandemic.
The announcement of the central bank rate (CBR) on Thursday was delayed by nearly a week with banking industry insiders claiming the central bank’s Monetary Policy Committee meeting scheduled for last week had been postponed.
Following the easing of restrictions for schools, churches, airlines, and border points, business activity has slightly picked up, raising hopes for traders hard hit by the containment measures of increased household spending.
However, the central bank warned that inflation would remain above its five percent target until about 2022.
Annual headline inflation slightly declined from 4.6 percent in August 2020 to 4.5 percent in September 2020, while core inflation rose from 5.9 percent to 6.2 percent during the same period, according to the latest government data.
“While there are no demand-side pressures evident, cost-push pressures emanating from higher taxes on imported consumer and intermediate products and social distancing measures could cause inflation to edge up further in the coming months. In addition, price pressures could increase, due to the further easing of lockdown measures as households increase spending on items that they had been forced to defer, e.g. expenditure on school fees. These pressures could also increase due to higher production costs from persistent supply disruptions,” BoU said on Thursday in its monetary policy statement.
Whereas financial analysts anticipate limited spillovers against the exchange rate arising from the new CBR decision, interest rates earned on treasury bills and bonds are projected to rise in the near future under pressure from increased government borrowing in the local debt market.
“The central bank’s decision to keep the CBR at seven percent is directly motivated by upside inflation risks linked to the easing of lockdown restrictions in various sectors. But the exchange rate will be driven a lot by other factors outside the CBR setting mechanism. The stable CBR will prompt some commercial banks to keep their lending rates stable over the next two months. BoU’s continued liquidity support to commercial banks is more focused on strengthening capital levels during the loan restructuring window that has added some pressure on banks’ cashflows but may not boost their lending capacity or appetite,” said Benoni Okwenje, the General Manager for Treasury Operations at Centenary Bank Limited.
“However, the government’s latest plans to borrow more money for budget operations during the current financial year will eventually accelerate yields earned on treasury bills and bonds," he added.
The government announced plans this week to borrow an extra Ush6 trillion ($1.6 billion) in the current financial year, with a lion’s share of the money to be mobilised from the domestic debt market, while the balance will be provided by the International Monetary Fund as the economy struggles to cope with the severe effects of the virus.