In the spirit of encouraging more Ugandans to take up loans, Bank of Uganda has reduced its central bank rate by 25 basis points to 9.75 per cent in the desperate hope that commercial banks can take note and do the same with their interest rates on loans.
The drop in the central bank rates which largely influences the direction of commercial bank interest rates comes at a time when many Ugandans are complaining about scarcity of money.
Bank of Uganda feels that more injection of money from banks into the economy will not trigger an upward movement of inflation a measure of the change in the price of goods and services arguing that prices are under control and below the set target.
Bank of Uganda is desperate to see Uganda’s economy grow stronger at a time of global uncertainty. especially the wars in Europe and the Middle East, which could disrupt global supply chains. Uganda’s manufacturing sector depends on the importation of certain key raw materials for the production of some finished goods.
Private sector credit is the engine that fuels growth of businesses. For years, there has been a tussle for this bank credit between the private sector and the government. The government has been accused of failing to control its appetite for commercial bank credit, which it sources when Bank of Uganda issues monetary instruments such as treasury bills and bonds on its behalf.
A reduction in the central bank rate is expected to see the yields on the government securities dropping too. Still, it takes weeks for commercial banks to adjust their loan rates to reflect the rate reduction announcement by the central bank.
The 25-basis point reduction is a cautious move by Bank of Uganda, pointing to possible risks ahead. The central bank is worried about many of the external factors outside its control, especially the geopolitical tensions in Eastern Europe and the Middle East, which could also affect the stability of the exchange rate and changes in the weather, just to mention a few.
Nevertheless, Bank of Uganda says: “Overall, the risks to the inflation outlook are balanced.”
