Bank of Uganda (BoU) has raised the Central Bank Rate (CBR) to it’s highest level since 2019, signaling that the situation could get worse unless the current spiking inflation can be mitigated.
This development follows a fourth meeting by the monetary policy committee on 6th October, 2022 where the benchmark rate was increased to 10% from 9%.
The Deputy Governor Michael Atingi-Ego told reporters Thursday that; “The Bank of Uganda remains determined to rein in on inflation and will continue to undertake the necessary measures to restore inflation to its target of 5% in the medium term.”
This new increase shoots the cumulative rate increases since June 2022 to 350 basis points, making it one of six central banks in Africa to hike it’s rate by at least 3 percentage points this year.
The monetary policy statement released on Thursday indicated that the annual core inflation, which excludes the volatile food and energy costs, has been above the central bank’s 5% medium-term target since May and at 8.1% is at the highest level in a decade while the headline price growth quickened to 10% in September from 9% in the previous month.
The Central Bank noted that things will get worse before they get better.
The committee revealed that the headline inflation is forecast to average 7.3% in 2022 and in a range of 8% to 10% in 2023, before declining back to the target of 5% in 2024.
On the upside, annual electricity, fuel and other utilities inflation which had been increasing since the beginning of the year, declined to 18.7% in September from 19.6 percent in August, 2022 offering some relief against the price pressures.
It said however, that the outlook for price growth is highly uncertain with the balance of risks still titled upwards.
Several risks were cited by the committee, including; , escalation of geopolitical tensions and associated supply chain disruptions, entrenchment of higher inflation expectations, stronger monetary tightening by major central banks further weakening of the exchange rate, plus the impact of adverse weather conditions on food production.
The decision aligns the Bank of Uganda with rate setters across the world that are raising borrowing costs at the fastest pace in a generation to remain in sync with the US Federal Reserve in smothering inflation, even at the expense of economic growth and attracting investors to strengthen their currencies and reduce import costs.
Uganda is one of the few central banks whose inflation-adjusted interest rate is at zero.
The central bank cut its economic growth forecast in August to 2.5% to 3% for 2022, from a previous estimate of 4.5% to 5%.
The shilling was little changed at 3820.19 against the dollar on Thursday by 1:51 p.m.