Central Bank warns of slow economic growth amid rising commodity prices

The Bank of Uganda has maintained the Central Bank Rate (CBR) for the month of April at 6.5% amid “weakening of the domestic growth momentum in March 2022,” caused by increase in prices of fuel and other goods.

In a statement issued on Tuesday, 12 April 2022, Dr Michael Atingi-Ego, the BoU Deputy Governor, said whereas the economy was at the beginning of the year projected to grow at above 6 percent, this has now changed due to effects of inflation.

“The most recent high-frequency economic indicators pointed to a weakening of the domestic growth momentum in March 2022,” the statement reads in part.

It adds: “The spike in global geopolitical tensions and supply chain disruptions are likely to hinder the stability and growth of the economy. Inflation has remained below the medium-term (2 – 3 years ahead) target of 5% for five years to March 2022.”

The annual headline and core inflation rose to 3.7 percent and 3.6 percent in March 2022 from 2.7 percent and 2.3 percent, respectively, in January 2022.

“Nevertheless, inflation remains below the target partly because the spike in prices of some commodities such as those of vegetable oil products carry a relatively smaller share of household budgets. Also, the strong shilling exchange rate helped to dampen price pressures,” Dr Ego said.

The Deputy Governor added that the main considerable risks surrounding the outlook for inflation include; higher global commodity and energy prices due to worsening of the Russia-Ukraine conflict and heightened uncertainty in the financial markets due to the sanctions on Russia.

He explained that the anticipated tightening of monetary conditions by central banks in Advanced Economies to contain escalating inflation could drive financial flows from frontier markets like Uganda to the safe-haven U.S. dollar assets, thereby weakening the shilling exchange rate.

Accordingly, Dr Ego said the Monetary Policy Committee judged that it was prudent to maintain the CBR at 6.5%, at this point.

“Similarly, the band on the CBR has been maintained at +/- 2 percentage points. Consequently, the margins on the rediscount and bank rates remain at 3 percentage points and 4 percentage points over the CBR, yielding rediscount and bank rates of 9.5% and 10.5%, respectively,” he said.

He added that BoU will closely track inflationary developments and take appropriate pre-emptive action, where necessary, to ensure inflationary expectations remain contained around the mediumterm target going forward.

“The BoU will maintain the credit relief measures for the education and hospitality sectors which remained under lockdown for an extended period. Furthermore, BoU will maintain the Covid-19 Liquidity Assistance Program (CLAP) to manage potential liquidity risks arising from the pandemic until the economic situation normalises,” he added.