Thread by @BOU_Official

The Bank of Uganda (BoU), at the Monetary Policy Committee (MPC) meeting of October 2021, has decided to maintain the Central Bank Rate (CBR) at 6.5 percent. #BoUCBR

The second wave of the Covid-19 pandemic interrupted the recovery of the economy and real GDP growth momentum is expected to have declined in the Sept 2021 quarter as a result of the COVID-related restrictions, 1/2

2/2...although by less than the first national lockdown in the 2nd quarter of 2020. With the ebbing of the second wave, a phased relaxation of the pandemic-related restrictions, and improving vaccine coverage, economic activity is gradually normalising.

Indeed, the high-frequency indicators of economic activity for August & September 2021 suggest that the economy is pulling out of the Covid-19 second wave impact. However, some contact-dependent sectors that faced the brunt of the pandemic continue to face difficult conditions.

Indeed, the high-frequency indicators of economic activity for August and September 2021 suggest that the economy is pulling out of the Covid-19 second wave impact. However, some contact-dependent sectors that faced the brunt of the pandemic continue to face difficult conditions.

The MPC noted that the virus continues to pose uncertainty in the near-term economic outlook.#BoUCBR

In addition, economic growth will depend on the release of pent-up demand, a boost to investment activity from the government’s focus on infrastructure and support to sectors that have been more adversely affected by the pandemic, and accommodative monetary conditions. #BoUCBR

Economic growth is projected in the range of 3.5-3.8 percent in Financial Year (FY) 2021/22, slightly lower than the August 2021 round of forecast. #BoUCBR

However, as vaccination rates increase further and the health-related restrictions are eased, the economy is expected to bounce back strongly. #BoUCBR

Economic growth is projected at 5.5-6.0 percent in FY2022/23, increasing to 6.5-7.5 percent in the medium-term (2 to 3 years ahead). #BoUCBR

A rebound of economic activity will be sustained by an acceleration in private consumption, strong growth in external demand, a gradual return of tourism, and foreign and domestic private investment in the oil sector. #BoUCBR

The outlook remains overcast by the future path of the pandemic, especially a major mutation of the virus that could severely undermine vaccine effectiveness and delay both domestic and global economic recovery. #BoUCBR

Moreover, considerable uncertainty exists regarding the longer-run economic impact of the COVID-19 pandemic. #BoUCBR

Furthermore, private sector credit extension remains sluggish due to perceived risk that continues to significantly impair private investment, compromising the quality of financial market information & lenders' ability to assess the viability of borrowers and investment projects.

In addition to spillovers from the rising commodity prices, especially of crude oil and other inputs, global supply chain disruptions could restrain economic growth in the near-term. #BoUCBR

Disinflation has persisted since October 2020, in part reflecting spare capacity in the economy.

Headline and core inflation averaged 2.3 percent and 3.1 percent, respectively, in the 12 months to September 2021, which is below the BoU's medium-term target of 5 percent. #BoUCBR

On a monthly basis, the annual headline inflation edged slightly higher to 2.2 percent in September 2021 from 1.9 percent in August 2021, in part reflecting an increase in food crop prices. #BoUCBR

However, annual core inflation remained unchanged at 2.2 percent, primarily due to a decrease in prices for services even though goods inflation rose. #BoUCBR

Notwithstanding the COVID-19-related restrictions and the recent exchange rate depreciation pressures, inflation forecasts indicate that inflation will remain within the 5 ± 3 percent target. #BoUCBR

Inflation is projected to remain below target in the near-term, as excess capacity continues to exert downward pressure on prices.

In the medium-term, as demand recovers with the full reopening of the economy and the release of pent-up demand, inflation is forecast to rise but stabilize around the 5 percent target, contingent on the evolution of the pandemic and the efficacy of vaccines. #BoUCBR

Uncertainty around the inflation projection remains high. Global producer price and food price inflation have risen sharply in recent months and could persist. #BoUCBR

Additionally, international commodity prices, especially oil and other inputs prices, have been on an upward surge since May 2020 and could rise beyond what the current projections assume. #BoUCBR

These developments could accentuate domestic cost pressures. Furthermore, the risk of currently elevated inflation in most of the advanced economies could necessitate an early exit from accommodative monetary policies. #BoUCBR

The resultant heightened volatility in global financial markets could lead to capital outflow and exert a stronger weakening of the shilling, while the economy is still at a relatively early stage of recovery. #BoUCBR

On the downside, a faster resolution of global supply chain disruptions, softer international commodity prices, and another round of good food crop harvest could cause inflation to remain subdued. #BoUCBR

The MPC assessed that inflation remains benign, that the risks to the economic growth outlook are skewed to the downside and that there remains considerable excess capacity in the economy. #BoUCBR

The MPC stressed that there is a persistence of high uncertainty and that economic and financial conditions are expected to remain volatile in the short to medium term. #BoUCBR

Against this backdrop, the MPC judged that keeping CBR unchanged at 6.5 percent would be consistent with meeting the inflation target of 5 percent sustainably in the medium term. #BoUCBR

The band on the CBR is also maintained at +/-2 percentage points on the CBR and the margins on the rediscount rate and bank rate have been kept unchanged at 3 and 4 percentage points on the CBR, respectively. #BoUCBR

Consequently, the rediscount rate and the bank rate have been maintained at 9.5 percent and 10.5 percent, respectively. #BoUCBR

The BoU Credit Relief Measures (CRMs) expired on September 30th 2021, but the BoU shall on a case-by-case basis, continue with interventions for those sectors that remain under lockdown.

Furthermore, BoU will maintain the COVID-19 Liquidity Assistance programme (CLAP) to ensure financial stability until the economic situation normalises. #BoUCBR
Prof. Emmanuel Tumusiime-Mutebile
GOVERNOR

October 14, 2021