Overview:

According to BoU Deputy Governor Dr Michael Atingi-Ego, although the inflation has been brought under control, there are several risks such as possible poor agricultural output, which could lead to high food prices, hikes in interest rates, and high global commodity prices.

The Bank of Uganda has maintained the Central Bank Rate (CBR) for the month of October at 9.5 percent despite inflation easing.

According to BoU Deputy Governor Dr Michael Atingi-Ego, although the inflation has been brought under control, there are several risks such as possible poor agricultural output, which could lead to high food prices, hikes in interest rates, and high global commodity prices.

“The downward trend in inflation is predicted to continue in the coming months due to lower imported inflation, further easing of food crop prices, and subdued aggregate demand but will return to the target in the medium term,” Dr Ego said in a statement released on Thursday, 05 October 2023.

“These projections are, however, subject to risks. On the upside, foreign exchange rate depreciation due to volatility in international financial markets, and escalation of the ongoing geopolitical conflicts could lead to further energy supply cuts and higher domestic fuel prices,” he added.

The CBR is a tool that the central bank uses to direct the cost of money (commercial bank interest rates) and in turn, control inflation by way of influencing the flow of money into the economy.

According to Uganda Bureau of Statistics, the annual headline inflation rate dropped to 2.7 percent from 3.5 percent recorded in August, while the core inflation (which excluded food and energy) fell from 3.3 to 2.4 percent, the lowest in 22 months.

BoU, however, says that the low inflation is due to lower spending by the public which has an impact on the economy.

The Central Bank says prolonged higher inflation in advanced economies could lead to higher interest rates, triggering further capital outflows and spilling into further exchange rate depreciation.

“The MPC [Monetary Policy Committee] assesses the risks to be balanced in the short term, but tilted upwards in the medium term.  Since the last MPC meeting, near-term prospects for the economy are broadly unchanged,” they said.

The recent quarterly GDP estimates by Uganda Bureau of Statistics (UBOS) indicate that quarter-on-quarter real GDP growth for the second quarter of 2023 stood at 5.2%, a much faster growth compared to 0.4% in quarter one.

The faster growth was due to a strong recovery in the services and industry sectors. The high-frequency indicators of economic activity also point to continued growth in the three months to August 2023.

Economic growth is projected to remain strong in the coming months due to continued recovery in services and industry sectors. Economic activity will be boosted by investment in the extractive industries financed by foreign direct investment (FDI).