The Governor, Bank of Uganda, Emmanuel Mutebile last week tightened monetary policy by raising the Central bank Rate by 1 percentage point to 12% in a move he said will forestall a rise in core inflation over the medium term.
He said depreciation of the exchange rate and faster real GDP growth will exert upward pressure on inflation over the medium term.
“The BOU forecasts that core inflation will rise to around 5% by the middle of 2015 and, in the absence of any adjustment to the monetary policy stance, will rise to a range of 7-9% by June2016,” Mutebile told a news conference.
“Furthermore, the BOU judges that the balance of risks to inflation forecast are on the upside, especially because of potential pressures from the exchange rate,” he said.
Mutebile maintained that band on the CBR at +-2 percentage points and the margin on the rediscount rate at 3 percentage points on the CBR.
“The rediscount rate and the bank rate will therefore be increased to 15% and 16% respectively,” Mutebile said.
The Central Bank Rate has been stationed at 11% for over six months following a 2011 surge in inflation.
BOU employed a tool of inflation targeting to bring back to control Uganda’s inflation that had hit double digits reaching the 30.4% mark.
Mutebile said indicators of economic activity point to g real Gross Domestic Product growth in the first half of 201415, supported by faster growth in the private sector borrowing.
“Although economic growth may have slackened off in the third quarter of the current fiscal year, actual real output is now estimated to be slightly above potential level.
“Real output growth may accelerate over the medium term stimulated by higher public investment spending and private consumption, pushing real output even above potential.
“This may exert upward pressures on prices for goods and services in the domestic economy,” Mutebile said.
He said the balance of payments is a source of weakness for the economy and it has been reflected in the pressure to the exchange rate in the last three months.
“The current account deficit remains large, and is likely to be in the region of 8.5% of the GDP in 201415, despite savings on the import bill as a result of lower oil prices, whereas financial account inflows have weakened over the last few months,” stressed Mutebile.
He said over the medium term, the current account will adjust to ensure external balance adding that BOU will intervene in the foreign exchange market to curb disruptive volatility in the exchange rate.
“But we shall not try to impede the real exchange rate from adjusting smoothly where this is needed to maintain external balance,” he noted.
Inflation remained relatively subdued in March 2015 with annual core inflation edging up to 3.7% in February 2015. The rise in inflation was in part driven by the pass through effects of the exchange rate depreciation on the prices of imported goods.
Annual headline inflation also rose in March to 1.9% from 1.6% in February. The low rates of headline inflation are mainly attributable to the negative food crop inflation which is a result of a good harvest in 201415.
Source : East African Business Week