Economic

Tough times as BoU moves to restrict money in circulation

Prince Mathias 4 years ago 2 min read

Kampala, Uganda | On July 6, Bank of Uganda held an emergency monetary policy committee meeting and decided to increase the central bank rate (CBR) by one percentage point to 8.5%, the highest since the country got hit by COVID-19.

The Bank had in June this year raised the rate by a percentage point. Previously, the Bank had been setting the interest rate signal almost every after three months to direct the movement of interest rates in the market, as a tool to manage inflation.

The main reason for this decision, officials said, was to signal to lenders not to lend money as much as they would, as a way of reducing money in circulation to fight spiraling inflation.

This decision has since sparked debate on whether BoU took the right path given that current inflation is imported and mainly comes from external cost pressures stemming from higher global food and commodity prices, persisting global production and distribution challenges and somewhat rising domestic food crop prices due to dry weather across the country.

There is also a general sentiment that people are ‘broke’ and this would ideally mean, BoU’s monetary policy decisions should work towards putting money in peoples’ pockets.

Data from Uganda Bureau of Statistics (UBOS) released on June 30 indicates that headline inflation increased from 6.3% at the end of May to 6.8% at the end of June. Core inflation, which is the target for monetary policy increased from 5.1% to 5.5% at the end of May and June respectively.

According to BoU data, the rising food and energy prices, intensified by a weaker Uganda shilling, have worsened the inflation outlook for the remaining part of 2022. Headline and core inflation are forecast to average 7.4% and 6.3%, respectively in 2022, slightly higher than the 7.2% and 6.1% that was projected in the June 2022 forecast round.

“The monetary policy committee assessed the uncertainties and risks to this forecast as significant and the balance of risks is tilted to the upside,” said Deputy Governor, Michael Atingi-Ego.