Uganda’s central bank cut its benchmark lending rate by 50 basis points to 11 percent on Wednesday, saying economic growth had slowed and core inflation would stay at a 5 percent target for the next 12 months.
The cut was the seventh in succession since last April, when the key lending rate was 17 percent while core inflation in early 2016 had been running at more than 7.5 percent.
Bank of Uganda Governor Emmanuel Tumusiime-Mutebile said there was scope to lower rates further as economic growth slipped. The economy was now unlikely to expand by 4.5 percent in the financial year 2016/2017 as previously forecast, he said.
While releasing the April Monetary Policy Statement, the Governor Bank of Uganda Prof. Tumusime Mutebile said the 2016-2017 growth rates will be way below the projected 4.5%.
He attributes this to the contraction in growth in the agriculture sector by 2% in four consecutive quarters, yet it contributes 22% to the National Gross Domestic Product.
He however expresses hope that in the near future, the economy will recover, if effects of calamities like drought are addresses.
The Bank of Uganda has consequently reduced Central Bank Rate by 0.5% to 11% this month to encounter core inflation rate which stands at 4.8%.
The governor told a news conference that weakening growth was due to poor rainfall in recent months that had hurt farmers. As with other regions of East Africa and the Horn of Africa Uganda has suffered a drought from the middle of last year to early this year, leading to poor harvests and food shortages.
The governor said a relatively stable shilling would put a lid on price pressures. Core inflation – which excludes food, fuel, electricity and metered water – was seen remaining around a target of 5 percent over the next 12 month, he said.
“Growth concerns are overriding,” said Razia Khan, Standard Chartered Bank’s chief economist for Africa, adding easing rates might not be enough to spur on credit growth after a major lender was taken into receivership last year.
The Bank of Uganda took control of Crane Bank in October because it lacked sufficient capital and has since transferred its assets and liabilities to another bank.
Khan said Crane Bank had been responsible for about 10 percent of private sector credit growth.