Uganda’s central bank left its Central Bank Rate (CBR) at 9.0 percent but said the risks to its inflation forecast had moved to the upside from rising import prices, a recovery of food prices, a closing of the negative output gap and a planned increase in taxes.
Although inflation is now projected to rise faster than previously projected, the Bank of Uganda (BOU) still forecasts that inflation will return to close to its its medium-term target of 5 percent during the 2018/19 financial year, which begins on July 1.
“The downward trend in inflation experienced during the course of FY 2017/18 will gradually be reversed, with import prices rising reflecting a combination of a gradual increase in global inflation and the weakening of the shilling,” BOU said.
Inflation is also expected to rise due to an expected recovery of food prices, the closure of the output gap and a planned increase in taxes on fuel pump prices and financial service during 2018/19.
In its previous monetary policy statement from April, the BOU estimated that risks to inflation were balanced and inflation was projected to converge to its 5 percent target by end-2019, with the pressures from improving demand not seen posing significant risks to inflation.
The BOU has kept its CBR rate steady since February this year when it cut it by 50 basis points as it continued an easing cycle that began in April 2016. Since April 2016 the key rate has been cut by 800 basis points.
Uganda’s inflation rate remains subdued with inflation down to 1.7 percent in May from 1.8 percent although food crops inflation rose to minus 0.2 percent from minus 2.1 percent.
Economic activity is continuing to strengthen with the statistics office forecasting growth of 5.8 percent in 2017/18, up from 3.9 percent in 2016/17 as growth improves across all sectors.
For 2018/19 growth is expected to strengthen further to 6.0 percent, BOU said.
Downside risks to the economy stem from a depreciation of the shilling and higher oil prices.
Over the last three months the shilling has come under pressure from a global strengthening of the U.S. dollar and a weakening of the current account from higher imports.
In 2017/18 the current account deficit is seen rising to 5.3 percent of Gross Domestic Product, up from 3.4 percent in 2016/17.
Uganda’s shilling has been depreciating since March and last week the BOU was seen selling dollars to support the shilling on strong demand from manufacturers, fuel importers and banks.
The shilling was trading at 3,832 to the dollar today, down 5.2 percent this year.
Uganda maintains rate although inflation risks to upside