The central bank has cut its benchmark rate by 100 basis points to 12 percent, saying slowing inflationary pressure gave it room to ease monetary policy.
The Central Bank on Wednesday announced a slash in the prime lending rate to 12% from 13% in November, the fifth time in a row the regulator is reducing the rate in 2016. The Bank of Uganda said that there will be further easing in monetary policy to keep the domestic economic growth momentum.
“The Consumer Price Index for November 2016 indicates a slight increase of inflation due to bad weather so we forecast inflation to be higher due to the rise in food crops and fuel prices and expect it to decline in the next 12 months,” central bank Governor Emmanuel Tumusiime-Mutebile told reporters on Wednesday.
Bank of Uganda still projects real GDP to grow by 5% for 2016/17, 5.5% for the year 2017/18 and 6% for 2018/19.
“Exchange rate is Dancing around due to global economic developments but we expect it to stabilize,” said Dr. Adam Mugume the Head of Research at BOU.
The overall economic out come remains unchanged from the last monetary policy statement.
Annual headline inflation, which strips out food and energy prices, increased to 4.6 percent in December from 4.1 percent in the previous month. Food crops and related items inflation rose to 7.1% from 1.7% over the same period.
The decision came as a surprise given higher international crude prices and expected monetary tightening in the U.S. later this year, according to Jacques Nel, a senior economist at NKC African Economists in Paarl, South Africa.
“While the outlook for the agricultural sector remains positive, it seems a bit premature to ease monetary conditions, particularly when considering that core inflation remains elevated,” Nel said by e-mail in response to queries.
Uganda, which hopes to start pumping oil in four years, estimates its economy could expand by 5.5 percent in the financial year through end-June 2017, from 4.6 percent in 2015-16, Finance Minister Matia Kasaija said in his annual budget speech in June.
