Uganda holds rate, growth below potential till 2023/24
Uganda's central bank kept its key interest rate steady for the third time as it trimmed its forecast for inflation this year due to the extent of the spare capacity in the economy at the same time the recovery from the pandemic gradually gains traction and risks to the near-term economic outlook ease.
The Bank of Uganda (BoU) left its Central Bank Rate (CBR) at 7.0 percent as in August and October after cutting it by 200 basis points in April and June.
Since BOU began easing its policy in October 2019, the rate has been cut 3 percentage points.
High frequency economic indicators in the three months to October indicate annual growth of 3.3 percent in sharp contrast to a contraction of 6 percent in the second quarter but BoU said this was in line with its projection for economic growth in fiscal 2020/21, which began July 1, of over 3 percent.
"However, the recovery is proceeding at an uneven pace," BoU said, adding social distancing measures continue to weigh on hospitality and tourism and economic activity is expected to take longer to recovery and resource utilization will take longer to return to normal.
"Economic growth is therefore projected to remain below its potential until FY2023/24," BoU said, adding there is a need for monetary policy to remain accommodative until the economy normalizes as inflation is projected to be well contained in the medium term.
In October BoU forecast Uganda's economy would contract between 0.2 and 0.5 percent in calendar year 2020 while growth in fiscal 20/21 was projected at 2.0 to 2.0-3.0 percent, rising to 5.0-6.0 percent in 2021/22 and 6-7 percent in later years.
In 2019 Uganda's economy grew 5.6 percent, largely driven by an expansion of the services sector, construction and mining.
But the COVID-19 pandemic hit economic activity hard, along with the invasion of locusts and flooding, and earlier this month the World Bank forecast gross domestic product growth of 0.4 to 1.7 percent as exports, tourism, remittances and foreign direct investment shrunk.
"The medium-term outlook is also not favorable for Uganda," the World Bank said, adding heightened uncertainty around the upcoming February 2021 elections further exacerbate risks.
Although BoU said the news about a vaccine "is reassuring and presents positive prospects," it revised downwards its forecast for inflation from October due to the considerable spare capacity in the economy.
Inflation is now projected in a range of 5.0 to 6.5 percent in 2020 before converging to its medium-term target of 5 percent.
In October BoU said there was a near-term upside to inflation and saw core inflation remaining above 5 percent before gradually returning to 5 percent in 2022.
Uganda's headline inflation rate dropped to 3.7 percent in November from 4.5 percent in October but core inflation only eased to 5.8 percent from 6.3 percent.
After falling sharply in March and then rebounding in the following months, Uganda's shilling has risen since the start of November and rose further today.
The shilling was trading at 3,668.6 to the U.S. dollar today, up 6 percent since a low on March 25 but still down 0.4 percent since the start of this year.