By Najibu Mulema
Though inflation has continued to slow down from 4.8-5.0 percent in August 2016 to 4.1-4.2 percent in September 2016 prices of food crops are rising day by day as well.
Due to high rate of drought covering almost every part of Uganda like Teso and Busoga regions, the food crop prices have continued to rise.
According to the monetary policy statement for October 2016, inflation has continued to slow down. Annual headline and core inflation declined to 4.1 percent and 4.2 percent in September 2016 from the respective 4.8 percent and 5 percent in August 2016.The main factors behind the inflation slowdown include weak consumer demand, decreasing inflation expectations and relatively stable exchange rate dynamics on the back of moderately tight monetary policy 12 months prior. However, because of the drought in many parts of the country food crop prices are rising with annual food crop inflation increasing from minus 1.9 percent to 5.1 percent in the last three months.
However, Prof Emmanuel Tumusiime Mutebile, Governor Bank of Uganda asserts that inflation in 2016 and 2017 is forecast to remain unchanged from August 2016 forecast. Increased demand pressures from the economic recovery are offset by the decline in costs because of lover imported inflation resulting from weaker global demand.
Nevertheless, the forecast for headline inflation is slightly higher in line with an upward revision in the food crop price forecast. While the Bank of Uganda (BOU) expects core inflation to remain around 5 percent within this financial year; this will help primarily, depend on the exchange rate movements as well as the impact of less than normal rains for the current season.
“Given that core inflation is forecast to remain around the medium term of 5 percent over the next 12 months, there’s a room to support the domestic economic growth momentum especially against the ongoing global economic slowdown. Therefore, the BoU believes that there is a scope to ease monetary policy,” said Mutebile.
In the same context, BoU noticed that a gradual recovery in private sector credit will support private sector spending and economic growth though there are risks to balance of payments arising from weakness in the economies of some of Uganda ‘s trading partners and the potential volatility of capital flows.
Accordingly, the Bank of Uganda will reduce the CBR by one percent point to 13 percent. The band on the CBR will be maintained at +/-3 percentage points and the margin on the rediscount rate at 4 percentage points on the CBR. Consequently, the rediscount rate and the bank rate have been reduced to 17 percent and 18 percent respectively.