Africa (Commonwealth Union) _ In a strategic move to stimulate economic growth and encourage more Ugandans to access credit, the Bank of Uganda has reduced its central bank rate by 0.25%, bringing it down to 9.75%. This adjustment reflects the bank’s hope that commercial banks will follow suit by lowering their own interest rates on loans, a step that could make borrowing more affordable for Ugandans facing a nationwide liquidity crunch.
Widespread concerns over limited cash flow in the economy have led to the lowering of the central bank rate, a pivotal benchmark for commercial bank lending rates. By encouraging banks to inject more money into the system, the Bank of Uganda aims to increase liquidity without sparking inflation. Currently, inflation is under control, remaining below target, which the bank sees as a green light for loosening monetary policy to stimulate growth.
This proactive rate reduction is especially timely given the backdrop of global instability, including conflicts in Europe and the Middle East, which could disrupt supply chains on which Uganda’s manufacturing sector relies for critical raw materials. With an economy already sensitive to external pressures, the bank sees this measure as a way to shield local businesses from potential impacts and bolster domestic production.
A thriving private sector depends heavily on access to credit, yet there’s been longstanding competition for bank credit between the private sector and government. The government’s borrowing, facilitated through instruments like Treasury bills and bonds, has often restricted the private sector’s access to affordable loans. Lowering the central bank rate is expected to gradually reduce yields on these government securities, potentially freeing up more credit for businesses as the private sector’s primary growth engine.
The Bank of Uganda’s reduction is cautious, reflecting concerns about a range of external risks beyond its control. Geopolitical tensions in Eastern Europe and the Middle East, for instance, threaten both global stability and Uganda’s exchange rate. Additionally, domestic weather patterns remain an unpredictable factor in Uganda’s economic stability. Despite these uncertainties, the central bank maintains a balance in the risks to inflation and expresses optimism about the positive effects of this monetary shift.
As commercial banks adjust their loan rates, Ugandans may begin to see improved borrowing conditions. The Bank of Uganda’s move, if effective, will boost private sector growth and strengthen the economy in the face of uncertain times.
