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Optimism as Central Bank cuts key rate to 10%

Peter 8th Aug, 2024 Economy Pedson Mumbere
Optimism as Central Bank cuts key rate to 10%

Deputy BoU Governor Michael Atingi-Ego at the press briefing yesterday.


The Bank of Uganda (BoU) has slashed the Central Bank Rate (CBR) by 25 basis points to 10%, a development that experts say would have significant implications for the banking sector and broader economic landscape in the country.

The Central Bank had previously raised the CBR to 10.25% in April 2024 in a bid to address inflationary pressures and stabilize the Uganda shilling, which had been under significant strain against the U.S. dollar for several months.

However, with inflation moderating and the local currency showing signs of stabilizing, the BoU has opted for a more accommodative stance, which is gradually bringing the key rate closer to the pre-pandemic level of 8.5%.

  • Speaking at a press briefing at the BoU headquarters on August 7, Michael Atingi-Ego, the Deputy Governor of the Bank of Uganda, noted that over the past 12 months, domestic inflation has continued to ease, with annual headline and core inflation averaging 3.2% and 3.0%, respectively, well below our medium-term policy target of 5%.

“This improvement is largely due to the diminishing impacts of global shocks such as the war in Ukraine and the COVID-19 pandemic, coupled with the tightening of monetary policy earlier this year,” he said, adding that the stability of the Uganda Shilling, which has shown a bias towards appreciation since March 2024, has been a key factor in the decision to lower the CBR.

He further noted that the recent increases in the CBR, along with strong inflows from coffee exports driven by favourable international prices, have played a significant role in stabilising the exchange rate.

  • Despite the overall positive inflation trend, both annual headline and core inflation edged up slightly to 4.0% in July 2024, from 3.9% and 3.8% in June, respectively.
Optimism as Central Bank cuts key rate to 10%Trend of Central Bank Rate for Uganda (2014 – 2023) (Source - Macrobond)

“The increase in inflation was primarily driven by service inflation, particularly in areas such as passenger transport, accommodation, recreation, and cultural services,” Atingi-Ego explained.

The role of the Central bank in managing inflation by adjusting the central bank rate is crucial. By raising the CBR, the Central bank can increase borrowing costs, which in turn reduces consumer spending and investment, thereby tempering economic activity and managing inflationary pressures. Conversely, a reduction in the CBR can stimulate economic growth by making borrowing cheaper and encouraging investment.

Patrick Mweheire, the Regional Chief Executive of the Stanbic Bank Group, suggested that the reduction of the CBR to 10% is poised to have several positive effects on the banking sector in Uganda. Lower borrowing costs are expected to encourage more businesses and individuals to take loans, thereby stimulating economic activity.

“Lowering the CBR is a welcome development for the banking sector,” he said. “It creates an environment where businesses can access cheaper credit, which is crucial for expansion and investment. This will likely lead to an increase in loan applications and overall banking activity.”

  • Going forward, BoU projects that inflation would remain below the 5% target for the fiscal year 2024/25, reflecting stable demand conditions, lower imported inflation, and continued exchange rate stability.
  • However, Atingi-Ego warned of “persistent uncertainties around the inflation outlook, including potential geopolitical tensions, energy price hikes, and unfavorable weather patterns.”

BoU’s decision to lower the CBR reflects a balanced approach to fostering economic growth while maintaining vigilance over inflationary pressures. As the country navigates the complexities of the global economic landscape, the Central Bank's monetary policy would continue to play a pivotal role in ensuring the country’s economic stability and prosperity.

The banking sector stands to benefit significantly from this development, as it paves the way for increased lending, investment, and economic activity.

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