Experts Predict Rise in Bank Lending Rates

2042 Views Kampala, Uganda

In short
Razia Khan, Standard Chartered Banks Chief Economist for Africa, says they forecast that due to the rise in inflation in September to 7.2 percent from 4.8 percent year-on-year, the central bank is likely to increase the CBR from 16 percent to 17 percent.

Financial experts predict that the Bank of Uganda is likely to raise the Central Bank Rate (CBR), the benchmark rate that determines commercial bank lending, from the current 16 percent to 17 percent next week.

 
This would in effect force commercial banks to increase their lending rates from the present average of 25 to 26 percent.
 
The Bank of Uganda's Monetary Policy Committee is scheduled to meet on Thursday 15th October during which it is expected to make a pronouncement on the CBR.
 
Razia Khan, Standard Chartered Bank's Chief Economist for Africa, says they forecast that due to the rise in inflation in September to 7.2 percent from 4.8 percent year-on-year, the central bank is likely to increase the CBR from 16 percent to 17 percent.

The bank had initially stated that the CBR was likely to remain unchanged at 16 percent but has had to revise its forecast after inflation surged to 7.2 percent in September.
 
The CBR is the interest rate at which a nation's central bank lends money to domestic banks which in turn determines the rate at which they lend to each other and to their customers. The ultimate aim is to diminish borrowing in order to reduce aggregate demand thereby reigning in inflation.
 
In April, the Bank of Uganda began tightening monetary policy after the Shilling's depreciation against the dollar deepened and inflation started to rise. From 13 percent then, the CBR has now reached 16 percent.
 
In June inflation stood at 4.9 percent and kept creeping upwards till September when it jumped to 7.2 percent, 2.2 percentage points above the inflation target of five percent.
 
The Shilling has also lost about 40 percent of its value against the dollar, making it the weakest currency in the East African Community.
 
Stephen Kaboyo of Alpha Capital Partners says the situation is likely going to worsen before it gets better because the fundamentals like weak export base are very much around.
 
The increase in CBR has, meanwhile, triggered increase in commercial bank lending rates which presently averages 25 percent. This is impacting negatively on private sector borrowing as many potential borrowers are keeping away.
 
According to Kaboyo, any increase in CBR will force commercial banks to increase their lending rates driving the cost of borrowing upwards.
 
From past examples, a percentage point increase in the CBR usually triggers about four percentage point increase in lending rates because the banks have to factor in risks and administrative costs, among others.
 
Everest Kayondo, the Chairman of Kampala City Traders' Association (KACITA), in an earlier interview with Uganda Radio Network, said the move by commercial banks to use the new rates on old loans is crippling many businesses who now have to pay huge amounts of money for smaller loans.
 
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About the author

David Rupiny
In his own words, David Rupiny says, "I am literally a self-trained journalist with over 12 years of experience. Add the formative, student days then I can trace my journalism roots to 1988 when as a fresher in Ordinary Level I used to report for The Giraffe News at St Aloysius College Nyapea in northern Uganda.


In addition to URN for which I have worked for five years now, I have had stints at Radio Paidha, Radio Pacis, Nile FM and KFM. I have also contributed stories for The Crusader, The New Vision and The Monitor. I have also been a contributor for international news organisations like the BBC and Institute for War and Peace Reporting. I am also a local stringer for Radio Netherlands Worldwide.


I am also a media entrepreneur. I founded The West Niler newspaper and now runs Rainbow Media Corporation (Rainbow Radio 88.2 FM in Nebbi). My areas of interest are conflict and peacebuilding, business, climate change, health and children and young people, among others."