Unease As BoU Tackles Inflation

Bank of Uganda Governor Emmanuel Tumusiime-Mutebile announced that he was maintaining his policy interest rate -the Central Bank Rate – at 11%, where it has been for the better part of 2014. As far as the Central bank is concerned, the government is on top of the inflation battle. However, analysts are divided over whether the economy is feeling the impact of that success. Razia Khan, a director at Standard Chartered Bank, says more needs to be done. “Given the wide differential between the policy rate (11%) and inflation (4.3%), we believe that there is more room for easing in this cycle,” says Khan.

She added that a further 50 basis points reduction at the BoU’s October monetary policy meeting is difficult to rule out.

Khan would reverberate with many commercial bank borrowers, who must pay high interest rates, which they argue, cannot support economic growth.

Mutebile was adamant that inflation “remains subdued” and so leaving the CBR the same level was the best decision.

Other analysts agree with the Central bank. Isaac Nkote, senior lecturer of finance at Makerere University Business School, said if all economic indicators – particularly inflation in this case – remains contained or moves marginally, then it is fine to leave the CBR unchanged “as they (BoU) watch the situation.” “After all you will reduce the CBR but it does not follow that banks will reduce interest rates for borrowers,” he said.

BoU officials said average commercial bank lending rates have gone down to 21% as of August 2014 compared to 28% recorded at the end of 2011 when year-on-year inflation jumped to 30.4% – the highest since 1993. The reduction has supported the recovery in private sector credit. Official BoU figures indicate that the average annual growth in private sector credit in the quarter to Jun-2014 was 12.7%, up from 7.8% in the quarter to March of the same year – mainly driven by increase in household and personal loans, and loans to the agriculture, building and construction sectors. Nkote described the reduction – albeit minimal – in lending rates as positive. “The reduction means banks have confidence in Bank of Uganda’s monetary policy decisions,” he said, adding that there are banks whose rates are below the 21% mark.

Adam Mugume, the executive director for research at BoU, said one of the achievements of inflation targeting lite regime that was debuted in July 2011 has been helping in the fight against sky-rocketing inflation.

Inflation decline:

The Uganda Bureau of Statistics (Ubos) announced at the end of July that annual headline inflation for the year ending July 2014 declined by 0.7% to 4.3%, compared to the 5.0% (revised) that was recorded for the year ended June 2014.

The statistics body said the decline was largely attributed to annual food crops inflation that decreased to 12.9% for the year ending July 2014 from the 17.2% for the year ended June 2014. Food carries the largest basket – 27% – in the calculation of the consumer price index, meaning that any change in this component potentially directs the rate of inflation.

The monthly food inflation, which includes food crops and manufactured foods, dropped by 1.7% during the month, driven by a decrease in prices of matooke, Irish potatoes, sweet potatoes, avocado, cabbage, eggplant, bitter tomatoes, onions, carrots, beans, groundnuts and fish at most centers. Similarly, there was a decline in the annual EFU inflation to 0.3% for the year ending July 2014 compared to the 4.1% that was recorded in June 2014.

However, the annual core inflation, which is the target for the Central bank, marginally increased to 3.0% from 2.9% in the period under review. But that appear not to have bothered Mutebile enough to prompt an increase in the CBR.

Both core and annual headline inflation have remained in single digits hence causing a smile on Mutebile’s face. But worries remain about core inflation, which could pick up to 5.5-6.5% in the next 12 months – which might explain the more cautious approach that he has taken.

Lower inflation levels and the somewhat reduction in interest rates have supported domestic economic growth – recorded at 5.7% – in 20132014, higher than 3.2% recorded in 20112012.

Mutebile projected GDP growth to be in the range of 5.5-6.5% in FY20142015, which he said was positive.

“I expect economic growth momentum to be sustained anchored by domestic demand with additional support from the improved external environment,” he said.

The key uncertainties for domestic economy, Mutebile said, continue to be centered on the timing and extent of the pickup in domestic investment and the prospects for export demand. Stability in countries like South Sudan, Egypt among others where Uganda exports goods, will influence the performance of the economy, Mutebile said.

In its monetary policy report for August, BoU says Uganda’s trade balance continues to deteriorate on account of stagnant exports and high import requirements.

The trade deficit fell by 11.4% from $2,123.0 million in 201213. In 201314, the trade deficit rose to $2,365.5 million from $ 2,123 million in 201213, but he was still positive about the growth prospects.

“It is possible that consumption and investment could be ger than expected,” he said before warning that there are external risks as the global economic outlook remains subject to a considerable degree of uncertainty.

He said prospects for global economic activity in 2014 are weaker than earlier anticipated but are expected to gather momentum in 2015.

Source : The Independent

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