Uganda changes its interest rates based on how rising prices (inflation) are affecting the economy.
Inflation is when the prices of goods and services go up, making things more expensive for everyone.
To control this, the central bank raises interest rates to make borrowing money more costly, which helps reduce spending and slows down inflation.
When inflation goes down, the central bank can lower interest rates, making it cheaper for people and businesses to borrow money, which can boost economic growth.
In a positive step for Uganda’s economy, the Bank of Uganda (BoU) has lowered its base interest rate to 9.75% for October, down from 10.0% in September.
This follows a decrease in inflation, which fell to 3.0% in September from 3.5% in August.
The drop in inflation was mainly due to lower fuel and food prices, according to the Uganda Bureau of Statistics (UBOS).
The decision to reduce interest rates comes as Uganda’s economy shows signs of improvement.
Higher earnings from key exports like coffee and gold, along with a stable Ugandan shilling, have helped the country recover from global challenges.
Usually, lowering interest rates enables the central bank to encourage more people and businesses to borrow money, which can help boost economic growth.
However, the global economy is also stabilising after the disruptions caused by the COVID-19 pandemic and the war in Ukraine.
The Ugandan shilling has remained stable against the US dollar, further helping the economy.
Deputy Governor of BoU, Michael Atingi-Ego, explained that with inflation staying below the 5% target, the central bank feels confident to reduce the interest rate.
The move is aimed at encouraging more borrowing from the private sector, which has been sluggish.
Over the last financial year, private sector borrowing grew by 6.8%, but this is far below the BoU’s target of 13%.
Challenges Ahead
Despite the rate cut, borrowing costs in Uganda remain high. Average lending interest rates hover around 21%, with prime lending rates at 17%.
This has led to public outcry, including from President Yoweri Museveni, who recently urged banks to lower their rates to boost economic growth.
While the BoU’s move is seen as a step in the right direction, there are still potential risks to the economy.
Dr. Atingi-Ego warned that rising geopolitical tensions in the Middle East and increasing agricultural prices could push inflation back up.
According to Dr. Adam Mugume, BoU’s Executive Director for Research, it could take up to 18 months for the effects of this policy change to fully reflect in the economy.
The central bank remains optimistic, forecasting economic growth of 6% to 6.5% for 2024/2025, with an increase to 7% by 2025/2026.
For now, the BoU’s decision signals an effort to balance inflation control with economic growth, aiming to make borrowing easier for businesses and individuals alike.
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