BUY UGANDA VANILLA BEANS                                                                                                                                SOYBEAN OIL 

Bank of Uganda Cuts Lending rate (CBR) to 11 percent

Bank of Uganda (BoU) governor Tumusiime Mutebile yesterday announced that the Central Bank has slashed its lending rate for from 11.5 to 11 per cent in a bid to boost demand within the economy and strengthen it over time.

“The Bank of Uganda has decided to reduce the Central Bank Rate (CBR) by 50 basis points to 11 per cent for June 2014,” he said.

Mr Mutebile said the move was supported by several factors top of which was the declining inflation rate.

Inflation continued to decline in May 2014 with annual headline and core inflation declining by 1.3 percentage points and 0.1 percentage points to 5.4 per cent and 3.3 per cent, respectively.

Credit growth
The other reason for this new rate was credit growth for the private sector despite commercial bank prime lending rates increasing from 20 to 21 per cent between March and April.

“There is increased demand for credit. Over the past six months, more people have borrowed from banks in the private sector. Commercial banks are reporting increase in personal loan borrowing for example,” said Dr Adam Mugume, the executive director research, BoU.
“Credit growth for the private sector has picked up a little and is expected to increase over the remaining part of this year and the next years. This will support private sector demand,” Mr Mutebile added.

Mr Mugume pointed out that over time, the biggest obstacle to economic growth and keeping the CBR low, is on the food prices.
“The outlook for inflation reflects two opposing forces. A fair degree of spare capacity in the economy will allow stronger growth without exerting pressure on input costs,” noted Mr Mutebile

“Working in the other direction is the impetus to tradable goods coming from the possible depreciation of prices of tradable goods coming from the possible depreciation of the exchange rate.

However, the governor expressed confidence that the setting new CBR was on the right end of fostering economic growth.

“The balance of risks remains tilted towards lower inflation and sluggish economic growth. Therefore a slight easing of monetary policy is appropriate,” he said.

The Central Bank’s decision has surprised many who believed that the initial 11.5 rate would be maintained as we moved into new fiscal year and with the budget reading just a week away.

Reactions about the reduction

Much as some analysts had predicted the CBR to remain unchanged, they attributed the reduction to reducing inflation levels.

“So in an unexpected move, the BoU cuts its central bank rate by 50 bps to 11%. This fully reverses the equally unexpected tightening seen last year, when the Bank of Uganda considered the price outlook to be more threatening,” said Ms Razia Khan, the Africa region head of research, Standard Chartered Bank.

“Given the deceleration in May inflation, we should not be surprised, although we had favoured ‘no change’,” she added.

The Monitor Newpaper

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