BOU Reduces Lending Rates to 19%

The less than one percent decline in inflation in June was enough for the central bank to lower the inter-bank lending rates from 20 percent to 19 percent for the month of July.

 

Dr Louis Kasekende, the deputy governor of Bank of Uganda, made the announcement on Tuesday while delivering the monetary policy statement for July 2012.

 

Kasekende attributed the decline in the Central Bank Rate (CBR) to favourable external and internal factors that have seen core inflation drop from 18.6 percent to 18.0 percent in June.

 

The CBR is the rate at which the central bank lends to commercial banks or commercial banks lend to each other on a seven-day basis. It determines the rate at which banks lend to their customers.

 

Kasekende said externally the weakness of the global economic growth and lower commodity prices including fuel prices, alleviated the external risks to inflation in Uganda. On the domestic front, said Kasekende, food crop prices fell in the last two months and are anticipated to fall even further.

 

The deputy governor anticipated that in the coming three months the country is likely to witness a more rapid fall in annual inflation rates.

 

Kasekende said the expected fall in inflation over the course of the next six to 12 months will allow a gradual reduction in policy interest rates which the Bank of Uganda expects commercial banks to pass onto borrowers in the form of lower lending rates.

 

He said in line with these factors, the Bank of Uganda is confident that core inflation will fall to single digits by the end of this year and fall even further in 2013 to the medium term target of five percent.

 

For a year now the central bank has been using interest rates to fight high inflation, the basis being that if banks lend at a higher interest rate it would reduce loans and thereby aggregate demand.

 

Kasekende said the central bank has assessed the usage of the CBR as an inflation targeting tool and concluded that it is so far effective, adding that most commercial lending rates are now pegged to the CBR.

 

Adam Mugume, the executive director for research, said there is a need to reduce the CBR even further in order to boost lending to the private sector and subsequently the economy.