Central Bank rate signals tough times

KAMPALA. The current state of Uganda’s economy can best be described by an English idiom – perfect storm. The decision by Bank of Uganda (BoU) to increase the key lending rate to 16 per cent up from 14.5 per cent on Monday signals that drift.
The Shilling has depreciated by 36 per cent since the beginning of the year leading to increased commodity prices. The Uganda Bureau of Statistics revealed last week that price increments had been visible in fuel, sugar and utility bills such as electricity.
Announcing the Central Bank Rate (CBR) on Monday Mr Emmanuel Tumusiime-Mutebile, the BoU governor, admitted that these factors are aersely affecting the economy. “ commodity prices have continued to falter, and this continues to be a source of uncertainty to export growth,” he said.
On top of paying higher prices on commodities, people and businesses borrowing from commercial banks have to incur higher charges on interest. Interest rates have been surging in the last three months. Rates had been averaging 22.4 per cent since April. The trend is likely to continue as banks react to BoU’s action.
“We get a lot of our money from commercial banks that determine their lending rates by following the trend of the CBR. This is money we use for capital expenditure and any increment means our production costs rise,” said Mr Ssebagala Kigozi, the Uganda Manufacturers Association executive director.
He said the increased production costs will translate to higher prices for finished goods.
Kampala City Traders Association chairman Evarist Kayondo, said: “We fear that just like last month, commercial banks will exploit by increasing the interest rates on the already existing loan arrangements.”
Banks argue that they have no option but to increase interest rates on loans because they pay expensively to attract savings.
“Banks usually borrow funds at variable rates to lend out, so an increase in those rates may affect customer existing loans as well. Also, the change in the market and economic conditions signified by an increase in CBR impacts operational costs of all loans,” said Centenary Bank head of corporate affairs Allen Ayebare.



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