Uganda cuts rate 100 bps, inflation to hit target late 2016

    Uganda's central bank cut its benchmark Central Bank Rate (CBR) by another 100 basis points as inflation is expected to fall faster than it expected in June as the stability of the exchange rate of the shilling has improved the near-term outlook for inflation.
    The Bank of Uganda (BOU), which has now cut its rate by 300 basis points this year, said annual and core inflation is now forecast to decline to the target of 5 percent by the end of this year, earlier than expected in June when inflation was seen converging to its target by early 2017.
    Uganda's headline inflation rate eased to 5.1 percent in July from 5.9 percent in June while core inflation declined to 5.9 percent from 6.8 percent.
    "The stability of the exchange rate, lower fuel and subdued domestic demand have contributed to the gradual dampening of inflation pressures over the last seven months," the BOU said, adding lower interest rates should help support a recovery of private sector credit and thus economic growth.
    After depreciating in 2014 and 2015, the shilling has been stable this year and was trading around 3,380 to the U.S. dollar today, down only 0.2 percent this year.
    Although Uganda's economy contracted by an annual rate of 1.3 percent in the first quarter of calendar 2016 - or the third quarter of financial year 2015/16 - the central bank said measures of economic activity for July indicate a recovery in the fourth quarter of the current financial year.
    The economy is forecast to expand by about 5.5 percent in the current 2016/17 financial year, which began on July 1, up from an estimated 4.6 percent for 2015/16, the BOU said, adding a recovery in private sector credit growth and higher public infrastructure spending were expected to support growth while higher uncertainty about the global economy could constrain exports.
    Uganda is Africa's largest coffee producer.


   The Bank of Uganda issued the following statement:

"Inflation continued on a downward trend that began at the end of December 2015. Annual headline and core inflation declined to 5.1 percent and 5.6 percent, respectively in July 2016 from 5.9 percent and 6.8 percent in June 2016. The stability of the exchange rate, lower fuel and subdued domestic demand have contributed to the gradual dampening of inflation pressures over the last seven months.

Although real output declined in the third quarter of Financial Year (FY) 2015/2016, the Bank of Uganda's high frequency measure of economic activity for July 2016, indicates a recovery in the fourth quarter of the Financial Year. As domestic demand picks up, the economy is projected to grow more strongly in FY 20 16/2017, at about 5.5 percent compared to the preliminary estimate of 4.6 percent for FY 2015/16. The recovery in private sector credit growth and higher public infrastructure spending are expected to support economic growth. However, uncertainty over international economic activity has increased substantially and this could constrain international demand for Uganda's exports.

The near-term outlook for inflation has improved as a result of the recent stability of the exchange rate. Annual core inflation is now expected to converge to the medium term target of 5 percent slightly faster than was anticipated during the last Monetary Policy Committee meeting held in June 2016. Both annual headline and core inflation are now forecast to decline to around 5 percent by end 2016.

The outlook for inflation is subject to several risks emanating from both the external environment and the domestic economy. Uncertainty over international developments has increased which could affect the exchange rate. In addition, weather related risks could affect food prices heightening the upside risks to domestic inflation. 

Given that inflation is forecast to stabilize around the policy target of 5 percent over the next 6 months, the Bank of Uganda believes that a continued easing of monetary policy is warranted. This will also help to support a recovery of private sector credit and hence support real economic growth. 

Accordingly, the BoU will reduce the CBR by 1 percentage point to 14 percent. The band on the CBR will be maintained at +1-3 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 18 percent and 19 percent, respectively."

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