Uganda cuts rates to 12.5% in bid to spur domestic economy

The Bank of Uganda (BoU) cut its benchmark central bank rate (CBR) from 13% to 12.5% in a bid to stimulate the local economy, despite concerns earlier rate cuts are not feeding through to borrowers, according to the central bank's monetary policy statement for November 2012.

With annual inflation and core inflation both falling in October from 5.5% to 4.5% and from 4.9% to 4%, respectively compared with September, the Bank of Uganda could turn its attention to economic growth. "These reductions in inflation have reinforced the BoU's confidence that core inflation will stabilise at around the medium-term target of 5% through to the middle of next year," said Emmanuel Tumusiime-Mutebile, governor of the BoU.

"In the short term, monetary policy will continue to focus on the objective of stimulating aggregate demand in order to boost the real economy without jeopardising the medium-term inflation objective."

Real GDP growth is predicted to rise to 5% for the fiscal year 2012–13, up from 3.4% the previous year. However, Tumusiime-Mutebile said this is well below the economy's potential of 6.5–7% per year. Since September 4, the BoU has cut rates at successive policy meetings from 15% to their current level. Tumusiime-Mutebile said this has caused an increase in commercial bank lending to the private sector, but described it as at a "slow pace".

"Commerical bank's lending rates have been sticky downwards. I note with concern that the interest rate spreads have recently increase," he said.

Click here to view the monetary policy statement.