BOU 'Not Yet Comfortable' With Commercial Bank Lending Rates

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In short
However, Dr Louis Kasekende, the Deputy Governor BOU says they have been “less successful in influencing bank lending rates, which has proved sticky compared to other interest rates.”

Bank of Uganda has been less successful in influencing the commercial bank lending rate Dr Louis Kasekende, the Deputy Governor has revealed.

In 2011, Bank of Uganda introduced the monthly Central Bank Rate-CBR. Under this system, BOU sets the pace for the interest rates for lending. CBR is also used to keep inflation within the target set by BOU.

However, Dr Louis Kasekende, the Deputy Governor BOU says they have been “less successful in influencing bank lending rates, which has proved sticky compared to other interest rates.” 

 //Cue in: It seems there are…
Cue out: …the lending rates//

The frustration indicated by BOU officials has been visible in the interest rates that have hovered between 20percent and 23percent on average for the last five months. This rate is higher than the 18percent charged before the monthly CBR announcement started making headlines.

Kasekende notes that the interest rates offered by commercial banks were skewed compared to the CBR. For instance, lending rates are on a 22percent average where’s the CBR is at 11.5percent.

Prof Emmanuel Tumusiime- Mutebile, Governor, BOU has offered his views on this policy, calling it a process where they have been “learning by doing.” When inflationary targeting was introduced in July 2011, inflation had been on a rise, hitting 30percent in October 2013. BOU came in to curb the runaway inflation by setting high interest rates, which led to a reduction in lending by commercial banks.
 
 
This tamed the inflation, but has not led to the much needed recovery in lending to the private sector. Commercial banks have largely been cautious in lending to the private sector since 2012, due to the high levels of default by customers, especially in the real estate sector.

Kasekende also says that costs of mobilizing money to lend by commercial banks also remains high, which has kept the rates much higher. He further says that the cost of money would have to first reduce before interest rates can drop significantly.

He however admits that some banks have now started responding positively towards the CBR, bringing their rates down. He projects that at the end of 2014, other banks will also have adopted interest rates, close to the CBR.

//Cue in: One of the banks…
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Both Mutebile and Kasekende praise the policy as one that has helped stem foreign exchange volatility, as was seen in February 2014, when the bank intervened in the market to save the shilling from depreciating by more than 4percent in less than a week.

Antoinette Sayeh, Director of IMF Africa Division also says that central banks should be able to react fast enough in order to keep their economies financially stable and safe.  
  
 

 

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