Central bank keeps interest rates at record highs, extends relief measures

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The Ugandan central bank on Monday kept its key rate at an all-time low, citing “heightened uncertainties” around economic growth.

Following its latest monetary policy meeting, the Bank of Uganda said it is keeping its key rate unchanged at 7% and extending its credit relief and liquidity assistance measures for businesses and institutions. financial statements, respectively, for six months from April 1.

The band on the CBR was maintained at [-/+]2%, the rediscount rate at 10% and the discount rate at 11%.

These measures appear to be part of a broader strategy to support private sector activity – and economic activity, therefore – with affordable credit and to ensure that inflation remains within target. 5% of the Bank.

The BoU’s first rate cut from the Covid-19 pandemic was in april last year when the CBR has been reduced from 1% to 8% in response to a “severe contraction” in economic activity. It was then reduced to 7% in June, its lowest level since the Bank adopted an inflation-targeting monetary policy in July 2011, and has remained there since.

The central bank also announced debt relief and liquidity assistance measures to support businesses and financial institutions in March. The measures entered into force on April 1, 2020 and were run for a year.

In the statement usually issued after the meeting, the bank’s monetary policy committee noted that the economic recovery has slowed since its last meeting in December as coronavirus infections increased. This underlined the “uneven pace” of the economy since the start of the current fiscal year, as “social distancing measures continue to weigh heavily on certain activities in the service sector, in particular education, hospitality and tourism “.

He added that the central bank’s high-frequency indicators of economic activity showed 2.6% growth in the quarter to December, compared to 9.2% in the previous quarter. In addition, private sector activity also declined in the last quarter of 2020 compared to the previous quarter, according to the Bank’s Business Confidence Index and the IHS Markit Purchasing Managers Index (PMI).

The Bank makes it clear that the trajectory of the economy will depend on the quality of the management of the coronavirus in the country and around the world. The tourism sub-sector is expected to recover once an effective vaccine against Covid-19 becomes widely available in Uganda and infections are contained.

Externally, stronger demand, global investment and reduced coronavirus uncertainty will lead to increased export earnings. Because a substantial amount of Uganda’s exports are destined for countries in the Common Market block of eastern and southern Africa “where vaccine deployment is likely to be slow,” the committee is concerned that the recession induced by Covid-19 persists in the region and hinder growth in the medium and long term.

The BoU forecasts that Uganda’s gross domestic product will grow between 3% and 3.5% in the fiscal year through June 2021. It is expected to reach between 4% and 4.5% in the preceding twelve months. June 2022, and between 6% and 7% the following years.

Besides a protracted pandemic, other downside risks to growth include “adverse weather shocks, weak private sector credit growth, increase in non-performing loans which could lead to higher interest rates on loans, problems of financing public investments which could slow down the implementation of public investments, global trade frictions and global demand which is still suppressed, ”the statement said.

The central bank adopts a more optimistic tone on inflation which it says the outlook is “benign”. In January, the overall year-on-year inflation rate edged up to 3.7% from 3.6% while core inflation declined to 5.5% from 5.9% the previous month.

“As the effects of public transport measures to contain Covid-19 wear off over the next four months, and in combination with considerable spare capacity in the economy, core inflation is expected to drop to around 4.5 % in 2021, “the statement read.

“Inflation should return to the 5% target in the long term, as excess capacity is absorbed in the medium term.”

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