The escalating financial meltdown in the country has to be reigned in through prudent monetary policies and economic supervision other than just targeting the lending rates, according to an economist.
James Ongino, an economist and accountant in private practice, was today reacting to Tuesday’s increment in the Central Bank Rate (CBR) from 14 percent in August to 16 percent in September.
The Bank of Uganda in July shifted its monetary policy from monetary targeting in which it controls money in circulation by holding excess liquidity in its reserves to inflation targeting.
This, the central bank does, by announcing monthly rates known as the Central Bank Rate (CBR) which it expects to increase the seven-day inter-bank lending rates and ultimately increase commercial banks’ lending rates to their borrowers.
In so doing, the central bank expects that few people would borrow money due to the high interest rates and thereby reduce money in circulation and curtail inflation, currently at 21.4 per cent.
Announcing the shift in monetary policy in July, the Governor of Bank of Uganda, Tumusiime Mutebile, said the financial sector has grown, diversified and become so competitive that it is hard for the central bank to control liquidity using the national reserves.
He mentioned over two-dozen banks, mobile banking, credit products, over 150 forex bureaus and the usage of Uganda’s currency in the region as some of the factors making it hard to control liquidity using the reserves.
According to Deputy Governor, Louis Kasekende, once the central bank increases the CBR, commercial banks are expected to respond accordingly by increasing their interest rates too.
Late last year, most banks announced a cut in interest rates but due to the new monetary policy shifts most commercial banks’ lending rates are hovering around the 30 percent mark.
