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Bank of Uganda Predicted to Keep Policy Rate Steady at 9.50%

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Bank of Uganda (BoU) is anticipated to retain its policy rate at 9.50 percent during its upcoming meeting in April, according to projections by Fitch Solutions. This forecast comes amidst a period where BoU’s monetary policy committee has maintained the policy rate at 9.50 percent for the third consecutive time. Notably, inflation has seen an uptick from 2.4 percent in October 2023 to 2.8 percent in January 2024 and further to 3.4 percent in February 2024. This rise can be attributed largely to statistical base effects and the delayed impact of exchange rate depreciation on import costs and services inflation.

Despite the inflationary pressures, the projection suggests that inflation is not anticipated to exceed the BoU’s medium-term target of 5.0 percent. However, it is expected that price growth will continue to accelerate in the coming months. Factors contributing to this acceleration include seasonal influences, such as the April-May agricultural lean period, which typically results in higher food inflation. Additionally, increased global shipping costs due to Houthi attacks in the Red Sea are expected to exert upward pressure on import prices in the near future.

The depreciation of the Ugandan shilling against the US dollar since August 2023 is also noteworthy, with a decline of 5.8 percent in its value. This depreciation followed decisions by the World Bank and the US government to limit economic ties with Uganda in response to the passage of the Anti-Homosexuality Act in May 2023, as highlighted by Fitch Solutions.

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The stability of the shilling notwithstanding, there is concern about a narrowing interest rate differential between Uganda and major markets. Such a scenario could impact capital inflows, which have historically provided significant support for the shilling. Therefore, while the shilling may have stabilized in the recent past, ongoing economic dynamics suggest the need for careful monitoring and strategic policymaking to sustain economic stability and growth.

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Related economic indicators and policy decisions will likely play a crucial role in shaping BoU’s future monetary policy direction, with a focus on maintaining price stability, supporting economic recovery, and fostering investor confidence amidst evolving global and domestic challenges.

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