The Bank of Uganda (BoU) has increased the Central Banking Rate (CBR) by one percentage point to 10%.
The decision was announced during the Monitory Policy Committee held on Thursday, October 6, 2022.
According to the statement by the Deputy Governor, Micheal Atingi-Ego, global financial and inflation pressures triggered the decision to increase the lending rate.
“A combination of global factors, the recent drought and a weaker shilling to U.S dollar exchange rate have driven the inflation to the highest level recorded since 2012 and deteriorated inflation outlook,” Atingi-Ego stated.
The Deputy Governor further noted that in the month of September, annual headline inflation increased to 10 percent from 9 percent recorded in August.
On a good note, annual fuel and utilities inflation declined from 19.6 percent in August to 18.7 percent in September, offering some relief against price pressures.
However, with the inflation outlook looking highly uncertain due to several risks that lie ahead, BoU warned that inflation is not about to stabilise.
“In the coming months, headline inflation is forecast to rise and average around 7.3 percent in 2022, and between 8 percent to 10 percent in 2023, before declining back to around 5 percent in 2024,” BoU noted.
The statement by BoU further shows that domestic economy which has weathered several shocks is returning back to the recovery path evidenced by growth in the Composite Index of Economic Activity by 1.2 percent in the quarter of August from 1.1 percent in the quarter to May 2022. This growth is attributed to increased industrial activity.
Despite the improvements in economic activity and business sentiments, the central bank highlighted that economic growth will likely remain below its long-run trend until Financial Year 2025/26.
“The risks of global recession and tighter financial conditions will likely weigh on domestic economic growth. Moreover, the potential for a sustained weakening of the shilling exchange rate coupled with lower foreign exchange reserves and constrained demand for Uganda’s exports could add to the external financing strains,” BoU noted.
Nevertheless, the Deputy Governor said that as BoU, they remain determined and will continue undertaking necessary steps to restore inflation to the target of percent in the medium-term.
