BoU increases lending rate rises to 10% as inflation remains unstable

The increased lending rate was announced by the deputy Governor of BoU during the Monitory Policy Committee held on Thursday, October 6, 2022.

According to the Deputy Governor, Micheal Atingi-Ego, global financial and inflation pressures triggered the decision to increase the lending rate.

“A combination of global factors, the recent drought and a weaker shilling to U.S dollar exchange rate have driven the inflation to the highest level recorded since 2012 and deteriorated inflation outlook,” Atingi-Ego revealed.

The Deputy Governor said in the month of September, annual headline inflation increased to 10 percent from 9 percent, as recorded in August of this year.

Fuel and utilities drop

Atingi-Ego said that the annual fuel and utilities inflation dropped from 19.6 percent in August to 18.7 percent in September, thereby offering some reprieve to the economy in the context of price pressures.

However, he added, future issues regarding inflation and the risks related thereto were not easily corralled, BoU thus warned that inflation is not about to stabilise.

“In the coming months, headline inflation is forecast to rise and average around 7.3 percent in 2022, and between 8 percent to 10 percent in 2023, before declining back to around 5 percent in 2024,” BoU noted.

The BoU statement reveals a domestic economy which has been challenged by fits and starts but is now repairing to the road of recovery, as evidenced by the growth in the Composite Index of Economic Activity by 1.2 percent in the quarter of August from 1.1 percent in the quarter to May 2022. This growth is down to increased industrial activity.

However, in spite of the upward path of the country’s economic gains, BoU states that economic growth will likely remain below its long-run trend until Financial Year 2025/26.

“The risks of global recession and tighter financial conditions will likely weigh on domestic economic growth. Moreover, the potential for a sustained weakening of the shilling exchange rate coupled with lower foreign exchange reserves and constrained demand for Uganda’s exports could add to the external financing strains,” BoU noted.

Nevertheless, the Deputy Governor said BoU will continue undertaking the necessary steps to restore inflation within the bounds of manageability in the medium-term.