It is Bank of Uganda's (BOU) first rate change since it raised the rate by the same amount in October 2018, returning its key rate to the level it was between February 2018 and October that year.
BOU lowered its inflation forecast sharply.
"The economy continues to grow but at a slowing rate," BOU said, noting gross domestic product slowed in the first half of 2019 from the second half of 2018 and the Composite Index of Economic Activity (CIEA) points to moderation of economic activity in the first quarter of the current 2019/20 financial year, which began July 1.
Uganda's GDP eased to annual growth of 5.4 percent in the second calendar quarter from 5.6 percent in the first quarter and in August BOU Governor Emmanuel Tumusiime-Mutebile had forecast growth in 2019/20 of 6.0 to 6.3 percent.
"The outlook is uncertain, particularly as a result of the unfavorable global economy," BOU said, adding a combination of widening fiscal and current account deficits could exert pressure on lending interest rates, leading to a further decline in economic growth.
Inflation in Uganda has been decelerating in the last three months and headline inflation fell to 1.9 percent in September from 2.1 percent in August, partly driven by a stronger shilling, moderating domestic demand and lower food prices.
Core inflation fell to 2.5 percent in September from 4.9 percent in June.
BOU lowered its forecast for core inflation to remain below its 5.0 percent target until the fourth quarter of 2020, with the risks to the downside and inflation forecast to converge to the target in the medium term, or over 2-3 years as demand side pressures remain subdued and the exchange rate is expected to remain relatively stable.
The revision to BOU's inflation forecast follows Tumusiime-Mutebile's forecast in August that core inflation would edge up and peak in the in the fourth quarter of 2020 at about 6.5 percent.
The Bank of Uganda released the following statement:
"Bank of Uganda (BoU) has in the October 2019 Monetary Policy Committee (MPC) meeting decided to reduce the Central Bank Rate (CBR) by 1 percentage point to 9 percent in response to the expected path of macroeconomic indicators and the international economic environment.
The economy continues to grow but at a slowing rate. Economic activity seems to have slackened in the first half of 2019 compared to the second half of 2018. Indeed, the recently released quarterly GDP estimates by Uganda Bureau of statistics (UBOS) indicate that GDP growth slowed in the second half of Financial Year (FY) 2018/19. In addition, the BoU’s high frequency indicator of economic activity, the Composite Index of Economic activity (CIEA), points to a moderation of economic activity in the first quarter of FY 2019/20. The outlook is uncertain, particularly as a result of the unfavourable global economy. Moreover, a combination of widening fiscal and current account deficits, coupled with public sector domestic financing needs, could exert pressure on the lending interest rates leading to further moderation of economic growth.
The Consumer Price Index (CPI) data for September 2019, released by UBOS, indicates that inflation remained subdued. Annual headline and core inflation declined to 1.9 percent and 2.5 percent, respectively from 2.1 percent and 2.7 percent in August 2019. The decline in inflation was in part driven by a relatively stronger shilling, moderation of domestic demand and lower food prices. Food crops inflation declined from minus 1.4 percent in August 2019 to minus 3.0 percent in September 2019. However, Energy Fuel and Utilities (EFU) inflation rose to 2.5 percent in September 2019 from 1.0 percent in August 2019.
The economy continues to grow but at a slowing rate. Economic activity seems to have slackened in the first half of 2019 compared to the second half of 2018. Indeed, the recently released quarterly GDP estimates by Uganda Bureau of statistics (UBOS) indicate that GDP growth slowed in the second half of Financial Year (FY) 2018/19. In addition, the BoU’s high frequency indicator of economic activity, the Composite Index of Economic activity (CIEA), points to a moderation of economic activity in the first quarter of FY 2019/20. The outlook is uncertain, particularly as a result of the unfavourable global economy. Moreover, a combination of widening fiscal and current account deficits, coupled with public sector domestic financing needs, could exert pressure on the lending interest rates leading to further moderation of economic growth.
The Consumer Price Index (CPI) data for September 2019, released by UBOS, indicates that inflation remained subdued. Annual headline and core inflation declined to 1.9 percent and 2.5 percent, respectively from 2.1 percent and 2.7 percent in August 2019. The decline in inflation was in part driven by a relatively stronger shilling, moderation of domestic demand and lower food prices. Food crops inflation declined from minus 1.4 percent in August 2019 to minus 3.0 percent in September 2019. However, Energy Fuel and Utilities (EFU) inflation rose to 2.5 percent in September 2019 from 1.0 percent in August 2019.
The inflation outlook has been revised downwards compared to the August 2019 round of forecast. Annual core inflation is now projected to remain below the 5 percent target until the fourth quarter of 2020. The risks to the inflation outlook in the near term (12 months ahead) are assessed to be largely on the downside and inflation is forecast to converge to the target of 5 percent in the medium-term (2-3 years). Demand side pressures remain subdued. In the absence of shocks, the relative stability of the exchange rate is expected to continue.
The BoU believes that the benign inflation outlook provides room for a reduction in the policy rate to support economic growth. The economy still has spare capacity and lower interest rates will help reduce the output gap. Against this backdrop, the BoU has decided to reduce the CBR by 100 basis points to 9 percent. The band on the CBR will remain at +/-3 percentage points and the margin on the rediscount rate and bank rate will remain at 4 and 5 percentage points on the CBR, respectively. Consequently, the rediscount rate and the bank rate have been set at 13 percent and 14 percent, respectively.
Going forward, the BoU will continue to monitor emerging price and output developments to ensure that monetary policy decisions remain consistent with price stability while being supportive of sustained non- inflationary economic growth over the medium term."
www.CentralBankNews.info
The BoU believes that the benign inflation outlook provides room for a reduction in the policy rate to support economic growth. The economy still has spare capacity and lower interest rates will help reduce the output gap. Against this backdrop, the BoU has decided to reduce the CBR by 100 basis points to 9 percent. The band on the CBR will remain at +/-3 percentage points and the margin on the rediscount rate and bank rate will remain at 4 and 5 percentage points on the CBR, respectively. Consequently, the rediscount rate and the bank rate have been set at 13 percent and 14 percent, respectively.
Going forward, the BoU will continue to monitor emerging price and output developments to ensure that monetary policy decisions remain consistent with price stability while being supportive of sustained non- inflationary economic growth over the medium term."
www.CentralBankNews.info
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