BoU expected to lower interest as Shilling,

Kampala- Last week, Bank of Uganda (BoU) was being credited for reacting fast in 2015 to curb inflationary pressures due to the depreciating Shilling. The action to raise the Central Bank Rate (CBR) led to a slowdown in credit to private sector and also reduced imports.

A CBR is the interest rate at which a nation’s central bank lends money to domestic banks, often in the form of very short-term loans. Managing the bank rate is method by which BoU affects economic activity.

Blamed
Over time, this has also been partly blamed for slowing down the economy – the price to pay in a bid to control inflation. What has been described as good monetary policy is credited to have offset the pass-through from the exchange rate to domestic prices.

Since January 2016, the Shilling has remained stable against the US dollar and this led to an easing of the CBR for two consecutive Monetary Policy Committee (MPC) meetings. Today (Monday), the expectation is that there will be further easing when the MPC meets.

Outlook
“Outlook for the Shilling indicate mild weakening on account of position covering ahead of the Central Bank policy meeting that is likely to reduce the policy rate as inflation continue to trend downwards,” Mr Stephen Kaboyo, managing partner at Alpha Capital Partners, said.

The Uganda Shilling at the start of 2016 was exchanging at around Shs3,450 for a dollar. This has since appreciated to about Shs3,370 by end of July 2016.

Monetary statements
In several of the monetary policy statements issued by Prof Emmanuel Tumusiime-Mutebile, the BoU governor, the volatility in the exchange rate has always been considered to be a big risk to the monetary policy and inflation.

At the meeting in June 2016, Mr Mutebile noted that inflation would fall back to the projected five per cent and as a result, the rate was slashed from 16 per cent to 15 per cent.
“Demand pressures on inflation remain subdued, and indications.

mmuhumuza@ug.nationmedia.com