The Central Bank on Tuesday raised its base interest rate, the Central Bank Rate in a bid to increase the cost of money to commercial banks so that the banks raise interest rates.
Experts have
voiced their views on how the Bank of Uganda is using its policies to control
rising inflation. They argue that the measures could hurt the economy more, at
least in the short run.
The Central Bank on Tuesday raised its base interest rate, the Central Bank
Rate in a bid to increase the cost of money to commercial banks so that the
banks raise interest rates.
This in the end should discourage households and businesses from borrowing, and
reduce the money held by the public.
The action
and the motive of the Bank have raised concerns and questions as to the
possible effects on the economy and in particular the personal, household and business
incomes of Ugandans.
The Monetary
Policy Committee of the Bank of Uganda unusually sits after every two months
and the last meeting was in June, to determine the direction of the cost of money
for the next two months.
However,
following the rise in headline inflation from 6.3 percent at the end of May to
6.8 percent at the end of June, the BOU Deputy Governor Michael Atingi-Ego,
called a ‘special’ meeting of the committee to take further action to control
the inflationary trend.
The increase
in the CBR just after a month, and by a whole percentage point has set the
public worried over the possible effects in the next months, especially when it
comes to seeking borrowing.
“Next is the
commercial banks' reaction to increasing interest rates on all the existing
loan portfolios. More suffering as little purchasing power will be the
result. Tightening the belts indeed,” says Moses Otai, the Country
Director, Child Fund.
Others
expressed worry that the monetary tightening is coming at a time when the
government should be making the availability of capital a priority, especially
for small and medium businesses.
This would hold the economy until the situation improves, according to
them. But instead, especially small and micro enterprises especially in
Kampala have been disputed by high costs of inputs and transport, calling for
government measures to ease the situation.
“This is
quite a huge increase, and I'm afraid it will undermine the capitalization of
already struggling businesses, couldn't we have applied other inflation-curbing
measures?” wondered Roger Kasule, a business consultant at Golazo Business
Ltd.
On the BOU
CBR policy, some are of the view that the banks are usually fast to increase
the interest rates, but are not willing to reduce them when the regulator cuts
its base rate.
However,
experts say the bank uses the hiking of the CBR because excessive inflation can
rapidly reverse all the economic gains, erode the value of savings and eat up
the profits of the private sector.
“It is true
that higher rates make borrowing more expensive. When credit is expensive, this
influences consumer demand for goods and services as well as investments. The
outcome helps to cool inflation," says Steven Kaboyo, the Executive
Director, of Alpha Capital Markets.
The
former Director of Financial Markets at the Bank of Uganda says that
this is the main reason why BOU is taking such radical steps even if they end
up hurting the economy in the short run.
In the last
few months, BOU has also intensified the use of government securities and selling
of foreign exchange to ‘mope- up excess liquidity in the market.
On Tuesday,
for example, BOU mopped out 344 billion shillings through an overnight
Repo.
Under the Repo basis, Treasury Bills are sold to the public and bought out the
following day or after two days, at a higher interest rate.
This has
been the practice since inflation started rising faster over the last four
months.
Economist,
Dr Fred Muhumuza advised the central bank against measures that might suffocate
the private sector by denying them liquidity.
Muhumuza
says measures like hiking the CBR would work if the inflation was ‘monetary’,
or caused by too much money in circulation. He advises instead that
commercial banks should be encouraged to lend more cautiously but not raise
interest rates.
He says instead, that the current trend is mainly a result of what is happening
in the global economies, unlike crises which are at times caused by more money
chasing fewer goods.
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This echoes the views and feelings among the public that money is scarce at the
personal and household level because of the high prices of essential goods and
services like cooking oil, sugar, soap, maize flour and wheat, as well as
services like transport.
Muhumuza says it is not right to curtail business operations by limiting the availability
of cash, which would otherwise keep them running through the hard economic
times.
He says instead, the Bank panicked and applied the CBR, which they raised too
fast.
