Riding on lower inflation and projected rebound in economic growth in the next financial year, Bank of Uganda (BOU) has reduced the Central Bank Rate (CBR) to 11 percent.
This is first CBR reduction since December 2013. The rate then was reduced from 12 percent to 11.5percent where it has remained constant to date.
Prof Emmanuel Tumusiime-Mutebile, the Governor BOU says the reduction was warranted in order to boost an economy growing below its potential. He was issuing the Monetary Policy Statement for June 2014 today.
Annual Headline Inflation in May 2014 hit a nine month low at 5.3 percent due to increased food supplies. Core inflation, which excludes prices of food crops, energy, water and fuel, also reduced to the lowest rate in over three years to 3.3 percent due to the appreciation of the Uganda Shilling against major foreign currencies in the last one year.
Prof Mutebile noted these inflationary factors, coupled with increased government and private sector expenditure could lead to growth of 6 percent in the next financial year.
The neutral stance to keep the CBR at 11.5 percent has had less significant impact on lending rates as they have remained above 20 percent. Credit growth that was projected to grow at 12.5 percent in 2013/14 only grew by 6 percent.
According to BOU however, all indicators are pointing to increased borrowing by the private sector for the next two years. Adam Mugume, the Executive Director Research BOU explains that for the last four months, there has been increased demand for loans by the private sector.
Stephen Kaboyo, the Managing Director Alpha Capital Partners, had on Monday projected that BOU was likely keep the CBR at 11.5percent as they wait for the budget reading.