In its latest decision, the Monetary Policy Committee (MPC) of the Bank of Uganda has chosen to keep the Central Bank rate (CBR) steady at 9.5 per cent.
This move, the bank explained, is aimed at ensuring that inflation remains in line with the medium-term target of five per cent. This decision comes as a response to shifting inflation trends compared to the forecasts made in August 2023. Notably, there has been a downward trajectory in inflation, which is expected to persist in the coming months due to factors such as reduced imported inflation, lower food prices, and subdued overall demand.
The MPC anticipates a return to the target range in the medium term. The inflation outlook for the fourth quarter of 2024 is projected to be between three per cent and four per cent, with a subsequent return to the four per cent to five percentage range in 2025.
Despite recent increases in fuel prices, annual inflation has remained in check, thanks to the implementation of effective monetary and fiscal policies, reduced impact from drought on food prices, and global economic conditions, the bank noted.
Annual headline and core inflation rates dipped to 2.7 per cent and 2.4 per cent in September 2023, down from 3.5 per cent and 3.3 per cent in August 2023. However, these projections are not without risks, with global inflation potentially impacting domestic inflation negatively.
On the positive side, Uganda could experience a bumper harvest, further driving down food prices and lowering inflation. Conversely, foreign exchange rate depreciation, triggered by international financial market volatility and geopolitical conflicts, may lead to energy supply disruptions and higher domestic fuel prices.
Moreover, continued higher inflation in advanced economies could prompt higher interest rates, resulting in capital outflows and exchange rate depreciation. The MPC assesses these risks as balanced in the short term but tilted upwards in the medium term.
In terms of economic growth, recent data from the Uganda Bureau of Statistics reveals a significant acceleration. The second quarter of 2023/24 saw a robust quarter- on-quarter real GDP growth of 5.2 per cent, a stark contrast to the 0.4 per cent growth in the first quarter.
This resurgence was fuelled by strong performance in the services and industry sectors, supported by high-frequency economic activity indicators, which show sustained growth up to August 2023.
Looking ahead, economic growth is expected to remain robust, driven by investments in extractive industries, financed by foreign direct investment and increased export earnings. Projections indicate growth between six per cent to seven per cent for the fiscal year 2023/24 and the medium term.
However, uncertainties loom on the horizon, including the potential for slower economic growth, disruptions in supply chains due to geopolitical factors, tighter fiscal policies influenced by global financial markets, and reduced household expenditure resulting from tight monetary conditions globally and adverse weather affecting agricultural output.
Given this assessment, the MPC believes that maintaining the current monetary policy stance will help keep drastic changes in the prices of goods and services in check, supporting economic stability, encouraging saving, investment, competitiveness, and socio-economic transformation.
