The Bank of Uganda (BOU) has implemented its first rate cut in a span of two years, lowering the Central Bank Rate (CBR) to 9.5 percent.
This move, aimed at stimulating economic growth, comes amidst a backdrop of evolving global economic dynamics and local fiscal challenges. With this decision, the central bank seeks to decrease the cost of credit which would in turn bolster lending, investments, and consumer spending, that have all been under pressure due to the recent economic uncertainties.
This reduction comes after a period of consistent increase, with the rate climbing from 6.5 percent in April 2022 to 10 percent in October 2022, a level maintained until the recent statement in June 2023.
The decision to cut the CBR was driven by the sustained decline in inflation, which dropped from 10.8 percent at the start of the year to 3.8 percent in July 2023.
This figure represents the lowest inflation rate observed in the past 15 months, as reported by the Uganda Bureau of Statistics (UBOS).
Michael Atingi-Ego, Deputy Governor, attributes this reduction in inflation to lower prices of agricultural and imported goods, a slowdown in global economic activities, and decreased domestic demand.
Despite the rate cut, the Bank of Uganda remains cautious about lingering global and domestic risks. Michael Atingi-Ego notes that although there are uncertainties, there is a higher level of confidence that global inflation, demand, and economic recovery will remain subdued for an extended period. This suggests the potential for continued inflation suppression.
Looking ahead, Dr. Atingi-Ego highlights the need for economic support over the next two years to boost economic activity, given the perceived weakness in the global economic situation.
The suspension of new credit to Uganda by the World Bank has raised concerns about its potential impact on the country’s economic forecasts. Atingi-Ego noted that it is difficult to predict the consequences until the Ministry of Finance compiles a list of affected projects and determines its response.
The Deputy Governor further explored potential outcomes for Uganda in light of the loan suspension from a major lender. He highlighted that the options available could be expensive.
For instance, if the government chose to increase domestic borrowing, reduce the budget, or reallocate resources, there’s a risk of affecting the country’s foreign reserves.
The Bank acknowledged Uganda’s resilient economy, which had been recovering well despite the global growth challenges, achieving an estimated annual growth of 5.3 percent in 2022/23. However, it pointed out that economic growth appeared to be slowing due to weak domestic demand.
Data from the Uganda Bureau of Statistics revealed a significant decline in economic growth in the second and third quarters of 2022/23, primarily driven by a 21.6 percent contraction in agriculture, along with negative growth rates of 2.3 percent in the industry sector and 1.39 percent in services.
Looking forward, the expectation is for a gradual economic recovery, with projected growth ranging from 5.0 percent to 6.0 percent in the fiscal year 2023/24. This recovery is anticipated to be driven by increased private sector consumption, investments in extractive industries, and improved exports, as highlighted by the Bank.
As businesses and individuals anticipate the effects of this rate cut on borrowing costs and overall financial landscape, experts remain cautiously optimistic about its potential to reinvigorate the nation’s economic trajectory.
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