THE governor of the Bank of Uganda, Emmanuel Tumusiime-Mutebile, has announced a 13% Central Bank rate for July, the first in a series of monthly rates aimed at clamping down inflation through adjusting the cost of borrowing.
Commercial banks will have to pay the 13% interest up from 11% on money borrowed from the Central Bank and in turn transfer the burden to their loan clients thereby making borrowing more expensive during the month of July.
“To tighten monetary policy, the Central Bank rate will be set at 13% for the month of July. The interest rate will be used to guide the seven–day interbank interest rates,” the governor said while addressing journalists at the Central Bank in Kampala.
The seven-day interbank rate is the rate of interest one bank charges another for money borrowed for a week.
Mutebile said the Central Bank would use its daily secondary market operations in the money market to steer the seven-day interbank rate as close as possible to the Central Bank rate.
He pointed out that the shortfall in supply of commodities that has seen prices of food and fuel shoot up is soon subsiding to bring down core inflation currently at 12.2% by the end of the year. “The Bank of Uganda intends to maintain a tight monetary policy stance to curb demand for credit and thus dampen inflationary pressures over the next six to 12months,
“This will ensure that core inflation is pulled back towards the target of 5%,” he explained.
Adam Mugume, the BoU director for research, said tight monetary stance would inevitably slow the country’s economic growth even while reducing demand for loans and the core inflation.
“We believe that in the next three months the tight monetary stance will drive down core inflation to a level between 10% and 12% and core inflation between 12% and 14%. This should increase interest rates and slow the country’s economic growth momentum,” he explained.
Some analysts said they had expected a higher Central Bank rate given one-week interest rates are running above 16%, but given the Central Bank’s stated determination to tackle inflation, it should be positive in the long run.
“With the promise of more tightening still to come, market expectations will be firmly geared towards further policy rate increases, especially if the foreign excahnge threat to the inflation target remains sustained,” said Razia Khan, an economist at Standard Chartered Bank in London.
“For now, the policy rate is at least positive with respect to core inflation. From an economic perspective, the Central Bank is delivering what is needed. Real interest rates are positive with respect to core inflation and given the substantial impetus to inflation as a result of supply-side shocks, yes, there is a requirement not to overdo the pace of tightening” he remarked..
i get the Economics behind that restrictive monetary policy however the cental bank Assumed that Inflation today is only a monetatery Phenomena, however imported inflation would not need only the monetary policy.it would really be a far fetched solution. ontop of that, detering people from borrowing to me it doesnt make sense cause a few have collateral. The increaesd aggregate demand may not be becasue of increased borrowing. assuming that we having demmand pull inflation is a wrong assumption as well. Anyway lets watch the market trends and see the out comes.!! Good move though.
ReplyDeleteIssues like increasd fuel prices( costs of prdn i.e high taxes VAT, CORPORATE) henece cost push inflation, imported inflation are really controlled by the monetary policy.