Executive Director in-charge of Supervision at Bank of Uganda, Dr Tumubweine Twinemanzi. PHOTO/COURTESY

Overview:

Reserve requirements are a tool used by the central bank to increase or decrease the money supply in the economy and influence interest rates.

Bank of Uganda has revised the Cash Reserve requirement by 2 percentage points from 8 percent to 10 percent as a measure that is expected to contain the rising inflation in the country.

Reserve requirements are the amount of cash that banks must have, in their vaults in line with deposits made by their customers. Reserve requirements are a tool used by the central bank to increase or decrease the money supply in the economy and influence interest rates.

Dr Tumubweine Twinemanzi, the Executive Director in charge of bank Supervision at Bank of Uganda, in a June 16, 2022 letter to commercial banks said these adjustments shall take effect from 23rd June 2022 “and all Commercial Banks are requested to comply.”

“This is to inform you that Bank of Uganda has made the following adjustments: 1) Revised the Cash Reserve Requirement by 2 percentage points from 8 percent to 10 percent.  2) Set the maximum limit for the Net Open position in the foreign currencies at -+10% of core capital of the financial institution, in line with the Financial Institutions Act (FIA),” he said.

Adjusting cash reserve requirements and net position in forex exchange for all banks is expected to reduce liquidity from circulation hence enable the Uganda Shilling appreciate against the dollar.

Raising the reserve requirement reduces the amount of money that banks have available to lend. Since the supply of money is lower, banks can charge more to lend it. That sends interest rates up. Changing the requirement is expensive for banks.