The Bank of Uganda has raised the Central Bank Rate by a percentage point to 8.5 percent, just a month after adjusting it to 7.5, as inflation spirals.
The Bank of
Uganda has decided to raise the Central Bank Rate by a percentage point to 8.5
percent as part of emergency measures against the spiraling inflation.
The Central
Bank Deputy Governor, Michael Atingi-Ego called an emergency Monetary Policy
Committee meeting to respond to the situation that has seen prices of most
essential consumer items rise sharply over the last three months.
The
Committee does not usually sit 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 Bank decided to take further action to
control the trend.
By raising the CBR, it is expected that commercial banks will find the cost of
money higher and raise interest rates, forcing the demand for credit to
fall.
There is likely to be more demand by banks for government treasuries because of
the expected higher returns, and this will further reduce the money in
circulation.
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This, it is
expected, will in turn lead to lower demand for some goods and services,
especially luxuries, and lead to lowering in prices, according to Dr
Atingi-Ego.
However, this also comes at a time when most people are adjusting their
spending partners by reducing or suspending spending on some goods and services
not considered so essential, as the rising cost of living dictates.
The
government has resisted all pressure to intervene directly in the rising
prices, saying it will not be tenable since the situation is determined by
external forces.
The high
inflation has largely been influenced by “external cost pressure arising from
higher global food and energy prices, persisting global production and
distribution challenges, as well as rising domestic food crop prices due to dry
weather across the country,” according to BOU.
Executive Director of Research at the BoU, Dr Adam Mugume says according to
their survey, there is a decline in demand by both households and
businesses.
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The bank
says that this situation is made worse by a weak Ugandan shilling that has
increased the risk of higher inflation which may go to 7.4 percent over the
rest of the year and into next year, according to the bank
forecast.
The Bank of Uganda has in recent months intensified its participation in the
financial market by buying out excess currency to tame the exchange rate and
strengthen the shilling, as well as selling treasury bills and bonds to control
the amount of money in circulation.
The shilling continued to gain ground on Tuesday and closed the day selling at
3720 to a dollar, from the opening rate of 3745, driven by interbank sellers
and low activity on the demand side.
