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How BOU’s CBR Affects You

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On Monday July 3 the Governor of Bank of Uganda (BoU), Prof. Emmanuel Tumusiime-Mutebile, presided over an emergency Monetary Policy Committee meeting on the 7th floor (and topmost) of the picturesque central bank building on Shimoni Road in the very heart of Kampala.

The MPS, apart from giving a monetary analysis of the health of the economy and offering the economic outlook, also sets the Central Bank Rate (CBR), the benchmark lending rate that determines inter-bank lending as well as onward lending by commercial banks to their borrowers.

Since early this year, the Governor, instead of announcing the CBR monthly had begun doing so every two months. In June he read the MPS setting the CBR at 12 percent. The next MPS was supposed to be in August, so it was intriguing to get an email on the weekend calling for a presser on July 13 in the boardroom on Floor 7.

As a background, it should be recalled that Uganda experienced hyperinflation after the 2011 general election. The government “forced” the Bank of Uganda to print all-new currency notes which circulated alongside the old notes. The new money was allegedly used to bankroll the elections.

With the economy in a tail-spin, the Bank of Uganda changed its monetary policy. Instead of acting as a “money granary” and, therefore, controlling the money in circulation by holding onto money or releasing, depending on the demand, the central bank shifted to targeting inflation.

The inflation targeting lite monetary stance uses a benchmark lending rate to determine other lending going forward.

Commercial banks usually borrow money from BoU and even among each other. The lending rates are usually lower. There is also a special window at BoU where the commercial banks go if they want to borrow.

So under inflation targeting lite monetary policy, if a commercial bank is illiquid and wants to borrow money from BoU, the CBR is used as the benchmark. For instance, if the CBR is 10 percent, that bank would borrow within the higher band of four percentage points that is 14 percent.

When the bank is lending the money it borrowed from BoU to its customers, it would also set its own lending rate to cater for the costs of lending and the profit margin. So it would lend at, say, 20 percent, the margin being much higher than the CBR margin.

The overarching aim of inflation targeting lite (or CBR for that matter) is to increase the cost of borrowing through a chain reaction, dampening aggregate demand and reducing money in circulation. This in turn has an effect on inflation, including the possibility of smoothing it, stabilizing it or reducing it.

Another crucial aim of the CBR is to raise a red flag alerting the general public that owing to dynamics in the economy, down the road – say in six or 12 months – inflation is forecast to rise or decline by whatever percentage so adjust your spending and consumption accordingly.

OK, back to Governor Mutebile.

As he would reveal later at the announcement of the Monetary Policy Statement (MPS) for July, Governor Mutebile said “special circumstances” had occasioned the announcement of the MPS, a month ahead of the scheduled announcement in August.

The special circumstances, he revealed, included the record low depreciation of the Uganda Shilling against the dollar to 3,600 on the sell side and inflationary jitters in the economy.

Indeed come June 13, Governor Mutebile, flanked by the “who-is-who” in BoU, announced the MPS, increasing the CBR for July by 1.5 percentage points to 14.5 percent, up from 13 percent in June.

The media, including Uganda Radio Network, hurriedly published the Big News but to “an indifferent public”, save for a few keen watchers of financial and economic dynamics.

Were Uganda be, say Spain, the whole country would have reacted (caught a cold) to what, for lack of a better phrase, I will call “The Mutebile Sneeze”. Before, during and after such pronouncements, the markets – financial, stocks, trade, etc. – would rally, moving up or down or sideways, depending on how good or bad the message is. Some players gain, some lose, some remain unchanged. Prices, interest rates, etc. rise or fall. Everyone takes note. Somebody (like a minister or chief executive) may even take responsibility and resign. A government may even collapse, as a new one gets elected. Some companies collapse. Strikes may even occur, paralyzing services like public transport. Etcetera etcetera.

On Monday, one powerful, influential, bullish and even kick-ass section of the economy took note. And, yes, not only did they take note but they actually started preparing, in anticipation, for the Governor Mutebile announcement and reacted rather too fast.


Standard Chartered Uganda, one of the financial Big Five, even predicted what Governor Mutebile was likely to say. Isn’t “forewarned forearmed” an old adage?

On Tuesday July 14, commercial banks started splashing advertorials announcing increases in lending rates for Uganda Shilling denominated loans and the bulk of domestic loans. That was hardly 24 hours after the Governor Mutebile announcement. Oh la la.

Therein lies one of the “secrets” as to why banks usually “have us” instead of us “having them”. I am sure you have heard one, usually a man, complaining, including in the newspapers, how he got a loan of so much and ended up paying more than the total of the principal amount borrowed and the agreed interest rate.

Of course we should not lose sight of the fact that banks tend to be exploitative, setting interest rates very high, for the so-called “high-risk” borrowers, whether the CBR rises or not. Usually, they pretend that the interest rate is, say 25 percent yet in reality it is 35 percent, thriving on the ignorance of their clients.

Make no mistake. A bank is not your friend. A bank will offer you an umbrella when the weather is at its best and will TAKE IT AWAY when the rain is torrential with hailstones. As they say, they want to “have you” and make a killing. Don’t they always post obscene profits and proudly announce them in the newspapers?

The CBR has implications for everyone, particularly borrowers. If it increases and you have a variable loan agreement, the bank won’t hesitate to increase your interest rate instantly. If the CBR decreases, the bank will take its time to reduce the interest rate or even not at all while you continue paying through the nose. In most cases, banks don’t announce that they are reducing interest rates. They will use all tricks and excuses to justify why they can’t scale down the interest rates hurriedly because many have borrowed at higher rates. And the reverse is also true when the CBR increases.

Call it greed.

When getting that loan – when you really need it – negotiate for an agreement with fixed interest rate so that any change in the CBR does not affect you adversely.

If you are a trader, an increase in CBR means less money in circulation hence low purchasing power of your customers and all the attendant effects.

By reducing aggregate demand, an increase in CBR literally slows the economy. The positive side is that it keeps inflation in check. If the CBR fails to rein in inflation then it is not effective. This calls for perhaps another increase till there is effect.

So pick interest in “The Mutebile Sneeze” in order to not only beware of developments in the economy but how to navigate and stay afloat.

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