Bank of Uganda increases lending rate to 8.5 percent amid skyrocketing inflation - UG Standard - Latest News
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Bank of Uganda increases lending rate to 8.5 percent amid skyrocketing inflation

Bank of Uganda headquarters in Kampala.

Bank of Uganda headquarters in Kampala.

Bank of Uganda (BoU) has increased the Central Bank Rate (CBR) by another percentage point to 8.5 percent in a bid to contain the skyrocketing inflation.

The decision was taken at an extraordinary Monetary Policy Committee (MPC) meeting held on Monday, July 4, 2022.

Dr. Michael Atingi-Ego, the BoU Deputy Governor, in a statement issued on Tuesday, July 5, 2022, said the increase was necessary to stabilise inflation.

“While the inflationary pressures are likely to be temporary, the MPC assessed that a markedly higher policy rate is needed to stabilise inflation around the target,” he said.

“Accordingly, the MPC raised the CBR to 8.5 percent and maintained the band on the CBR at +/- 2 percentage points. The margins on the CBR for the rediscount and bank rates remain at 3 percentage points and 4 percentage points, respectively. Consequently, the rediscount and bank rates are now 11.5 percent and 12.5 percent, respectively,” he added.

BoU also increased the Cash Reserve Requirement by 2 percentage points to 10 percent, effective 23 June 2022.

“MPC considers that the monetary policy stance will have to be tightened even further so as to ensure that inflation eases back to target in the medium-term,” he added.

Dr Ego observed that inflation continues to rise, largely influenced by external cost pressures stemming from higher global food and energy prices, persisting global production and distribution challenges, as well as rising domestic food crop prices due to dry weather across the country.

The annual headline and core inflation rose to 6.8 percent and 5.5 percent in June 2022 from 6.3 percent and 5.1 percent in May 2022, respectively. Annual food crop inflation has sharply risen from 0.7 percent in February 2022 to 14.5 percent in June 2022.

He said overall, economic activity is projected to remain modest as the shocks to commodity prices, production and distribution disruptions, and global inflation continue to dim the prospects for domestic economic growth.

“Economic growth is still projected in the range of 4.5-5.0 percent in 2022 and rising slightly to 5.0-5.5 percent in 2023, in part supported by public investments. Weaker external demand, high domestic inflation and resultant tighter domestic financial conditions will constrain exports, consumption, and investment,” he added.

The June 2022 preliminary GDP estimates by the Uganda Bureau of Statistics (UBoS) indicate that the economy grew by 4.6 percent in Financial Year (FY) 2021/22 from a revised growth rate of 3.5 percent the previous year.

The economic growth was driven largely by private investment despite imports far exceeding exports. On the production side, the industry and services sectors were the main drivers of growth, with some of the services sector activities, such as education and trade recovering.

However, BoU said households’ and businesses’ expectations about economic developments have grown more tepid, and the global economic outlook is highly uncertain.

“Indeed, the Composite Index of Economic Activity (CIEA), a high-frequency indicator of economic activity, continues to signal a slowdown in the pace of economic recovery in the second half of the financial year. The CIEA growth in the three months to May 2022 decelerated to 0.9 percent from 2.1 percent in the three months to February 2022,” the Central Bank observed.

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