The Bank of Uganda has increased the Central Bank Rate (CBR) for March 2024 to 10% as the Uganda Shilling continues to depreciate against the US Dollar.

The CBR, a vital tool in the central bank’s toolkit, is employed to regulate the cost of money, influencing commercial bank interest rates and, consequently, steering inflation by managing the money flow within the economy.

Dr Michael Atingi-Ego, the Deputy Governor, on Wednesday, March 6, 2024, emphasized that the monetary policy had to be tightened amid the weakening shilling and the rise in inflation.

“The inflation outturns in February 2024 indicate that both headline and core inflation rose to 3.4% from 2.8% and 2.4% in January 2024, respectively,” he said.

“Whereas the main contributors to the rise in inflation are services and Energy Fuel and Utilities (EFU), this combined with the shilling depreciation could spill over into a generalized price increase if not contained,” he added.

The Deputy Governor explained that exchange rate depreciation since November 2023, with a sharp depreciation in February 2024 has in part been caused by the outflow of some offshore investor funds from the domestic market pursuing more attractive yields available in other markets, strong domestic demand partly as a hedging mechanism against further depreciation, and seasonal factors.

He warned that further exchange rate depreciation could drive inflation above the medium-term target of 5% by the second half of 2024.

“Additionally, whereas there are downward inflationary pressures arising from the continuing vanishing effects of supply-side shocks, receding inflation around the world, and improved domestic food supply, these are likely to be outweighed by the effects of a weaker shilling,” he said.

The inflation trajectory, going forward, would be shaped by the outlook of the shilling and the other goods inflation. The inflation forecasts have been revised upwards in the short tens (12-month horizon) in light of the exchange rate depreciation. Inflation is projected to rise above the medium-term target of 5% by quarter one of FY 2024125 and stay above 5% throughout 2025 unless monetary policy is tightened.

“Therefore, the MPC raised the CBR by 50 basis points to 10%. The bands on the CBR remain at +/-2 percentage points and the margins on the CBR for rediscount and bank rates at 3 and 4 percentage points, respectively. As a result, the rediscount and bank rates will rise to 13% and 14%, respectively. Going forward, there are prospects for a higher CBR to bring inflation down and anchor inflation expectations or a lower CBR if the risks do not materialize,” the Deputy Governor said.

Economic growth for FY 202324 is projected to remain unchanged with growth of 6%. However, economic growth in the outer years is projected in the range of 5.5% to 6.5% compared to an earlier projection of 6.5% to 7.0%. The downward revision of growth in the outer years largely reflects the likely impact of tighter monetary policy, which is required to stabilize inflation around the medium term.