Bank of Uganda (BoU) yesterday reduced its key policy rate, Central Bank Rate (CBR) to 15 per cent from 16 per cent, a move it said is aimed at lifting the economy from slow to higher growth rate in the near future.
This is the second consecutive time that BOU has reduced its policy rate to revamp the economy that has faced several challenges right from the beginning of the Financial Year 2015/16.
Uganda's economy registered low growth rate of 4.6 per cent for the Financial Year 2015/16, down from an earlier projection of 5.0 per cent.
The slower growth rate has been attributed to several factors, including the February general elections, weak global economic growth, low commodity prices, heavy depreciation of the Shilling, a rise in inflation in the first quarter of the financial year due to pass through of exchange rate depreciation and tight monetary policy, which led to a rise in commercial lending rates.
Presenting the monetary policy for the month of June yesterday, the governor BoU, Mr Emanuel Tumusiime Mutebile, said BoU is cognisant of the fact that demand pressure on inflation remains subdued, and indications are that domestic demand is likely to remain constrained at least in the remaining part of 2016.
"Given that inflation is forecast to fall back to the policy target of five per cent over the next 12 months, BoU believes that there is scope to continue easing monetary policy.
Accordingly, BoU has reduce the CBR by one percentage point to 15 per cent as one of stimulus measures to support economic growth rate," he said.
Going forward, Mr Mutebile said economic activity is expected to improve with domestic demand being the key contributor to economic growth amidst continued weakness in the external sector.
However, he was quick to state that the recovery is expected to be slow with downside risks. "The outlook for domestic and external cost pressures is a key source of uncertainty," he said.
The BoU executive director of research, Dr Adam Mugume said Uganda's economic growth will begin to pick up in first quarter of 2017.
Dr Mugme said the impact of the current monetary policy operations will be felt in the economy after one year in form of reduction in commercial lending rates and pick-up in economic growth. "Policy impact always has a lag effect in economic growth and in lending rates," he said.
On commodity exports, Dr Mugume said slowdown in global economy has seen Uganda earning low from commodity exports, while the fall in oil global oil prices has led to reduction in the country's import bill from April last year to April this year.
