The Central Bank Rate begin to rise again

By Nankwanga Eunice Kasirye

Central Bank Rate begins to rise again…

The Central Bank of Uganda has announced a rise in the Central Bank Rate from the august 11% to 12% this month. The increase is meant to check the increased inflation which results from supply side shocks to agriculture.  Food inflation rose by 16% last month prompting an immediate  tight stance since any laxity would lead to a spill over to none food items causing a crisis.

Bank of Uganda has raised the September Central Bank Rate from 11% to 12 % which literally presents serious worry to the common person in Uganda. The last time the Central Bank announced a rise in the Central Bank Rate, it meant increased cost of finance with very high interest rates on private sector loans, high cost of living, high rate of none performing loans and business collapse. The central Bank introduced the monetary policy to check the galloping inflation which hit 30.4 %, the highest in 20 years’ time.

 The commercial banks responded promptly with high interest rates on new and running loans. This was the central bank basic interest to reduce the rapid growth of credit and encourage savings for a better exchange rate.

 The inflationary pressures abated and the central bank eased its monetary stance by reducing the central bank rate to 11% last month. But now that the inflation rates presented an upward trend last month resulting from the supply side shocks to agriculture, the monetary stance is again tightened.

But Emmanuel Mutebire the governor Bank of Uganda   warns that commercial banks should not use the one percentage point raise of the central bank rate as excuse to raise the already high interest rates on loans. The central bank had begun to realize good results from the campaign to implore commercial banks to reduce interest rates but the food inflation that pushed high by 16%   last month alone might change the trends.

EMMANUEL MUTEBIRE-GOVERNOR BOU

According to the Central Bank, core inflation is likely to be pushed up in the next 12months   and this is also prone to affecting real growth for the next financial year. But the bank projections predict that the threat will not repeat the 2011 scenario where inflation hit 30.4% the highest since 1993. This is because the factors that influenced inflation then, such as rapid bank credit growth and large exchange rate depreciation are not yet threatening.

But the Central Bank is also working out efforts to ensure that the food inflation does not spill over to none food items through second round effects. A modest tightened monetary policy is to be implemented to discourage raise of none food prices.

The Uganda Bureau of Statistics last week announced acceleration in inflation with annual headline figures rising from 5.1% in July to 7.3% in the month of august.

BANK OF UGANDA