Borrowing Stagnates As Lending Rates Remain High – BOU

The reluctance by commercial banks to lower further the lending rates on loans has forced the private sector to stagnate on borrowing, the Deputy Central Bank governor has said.

Louis Kasekende, while issuing the monetary policy statement for March 2013 on Tuesday, said the private sector was still facing difficulties in recovering from the recent increased inflation, which saw both the Central Bank Rate (CBR) and lending rates by commercial banks soaring to double digits. CBR is the rate at which Bank of Uganda (BoU) lends to commercial banks and it determines the interest rates on loans.

Kasekende, however, explained that the annual growth in monetary aggregates has continued to recover but slowly, with the private sector registering the most improvement. He added that it was likely that the ability of the private sector to spend would improve further if the current performance continues. He said BoU had decided to keep the CBR at 12 percent for the month of March in order to help reduce the inflation to around 5 percent without compromising further recovery of the economy.

Kasekende noted that the fall in food crop prices buoyed by ample supply helped reduce the annual core inflation from 5.6 to 5.5 percent due to a fall in price of food crop harvest.

On the international scene, the deputy governor dismissed suggestions that the decision to fix the CBR was influenced by the general elections in Kenya. He said while consideration is given to global factors, the elections did not affect the central bank rate, which has remained at 12 percent.

It is expected that the decision to keep the CBR constant at 12 percent for the third month running would ease the inflationary pressure on the economy. Bank of Uganda says they hope that the commercial banks would also heed to the gesture and subsequently reduce their lending rates.

There have been announcements by some of the commercial banks indicating they have reduced their rates. Currently, the interest rates arrange from 19 to 21 percent. At the height of the inflation, some of the commercial banks charged as high as 29 percent interest.

However, contrary to demands and expectations from the public that commercial banks should also reduce their lending rates, Kasekende said it was unlikely for the commercial banks to respond with reduced rates immediately.

He said the individual banks would reduce their lending rates depending on the level of the costs they are incurring to operate. He however said they were constantly urging the commercial banks to further lower their lending rates.

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