What BoU Maintenance of Key Lending Rate at 9.5% Means

1094 Views Kampala, Uganda

In short
Dr Kasekende said based on the outlook for inflation and economic activity, together with an expansionary fiscal policy in 2017/18, and the evolution of the risks and uncertainties, the BoU judges that the current stance of monetary policy remains appropriate

The Bank of Uganda (BoU) on Monday maintained the central bank rate (CBR) at 9.5 percent, its position since October. Announcing the CBR, Deputy Governor Dr Louis Kasekende said the previous policy easing actions had improved economic conditions. 
Dr Kasekende said based on the outlook for inflation and economic activity, together with an expansionary fiscal policy in 2017/18, and the evolution of the risks and uncertainties, the BoU judges that the current stance of monetary policy remains appropriate.
According to Kasekende, the near-term outlook for inflation remain subdued, slowing to four percent year-on-year in November, with core inflation projected to pick up in 2018/19 to around nine percent as spare capacity in the economy is reduced.
Dr Kasekende said there are upside risks to the outlook, including the future direction of food prices and the path of the exchange rate, with the latter contingent on the external economic environment. The CBR is a key lending rate that acts as a signal to the economy and determines, among other things, the rate at which banks borrow from each other and lend to the private sector. 
According to financial experts, lower interest rates spur borrowing by the private sector which translates into more investments and general spending, increasing aggregate demand which boost economic growth.
Ever since the CBR started dropping from 17 percent in April 2016, banks have also reduced their prime lending rates but not by the same margins of CBR.
Most banks are maintaining their prime lending rates - that is the rate reserved for their most risk-free clients - for shilling denominated lending at 18/19 percent, meaning the rate for others are higher.
In an ideal situation lower CBR should translate into much lower interest rates, but the Ugandan situation is queer. Stephen Kaboyo from Alpha Capital Partners says while the CBR is now at 9.5 percent, the lowest ever since BoU adopted the inflation targeting monetary policy, there has been a modest improvement in private sector credit, which has largely been slow to respond, only rising marginally.
Bankers argue that there are other factors keeping interest rates high, like high cost of operations and the high risk of lending. Another crucial factor is that government also borrows from the banks by selling government papers at about 15 percent. Since government papers are risk-free, yet fetch higher interest rates, banks find them more attractive.
According to financial expert Dr Geoffrey Onegi-Obel, banks, most of which are foreign-owned, are also content with keeping large funds from multinationals, international organizations and foreign missions from which they generate lots of profits. Interestingly, while the shilling denominated loans have higher interest rates, foreign currency denominated ones are at 10 percent, and benefits multinationals and other big players like importers more than the ordinary borrower.
Speaking at the NTV Economic Summit 2017, the BoU Executive Director for Research and Policy, Dr Adam Mugume, said banks don't use the CBR to determine lending but rather the amount of savings.  Ugandans have a very poor saving culture. The country's gross national savings, as percentage of GDP, is at 20.1 percent, according to a 2016 International Monetary Fund's World Economic Outlook data.
According to economist Dr Fred Muhumuza, Uganda's economic growth needs to be higher than what it is presently - a projected four to 4.5 percent - if it is to cope with a population growth rate of three percent. Although lower interest rates boost economic growth, it can also lead to lots of supply of money in the economy, triggering inflation. 
That is why the BoU sets its target for core inflation at five percent, adequate to stimulate the economy yet also not triggering inflationary pressures.


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."