Uganda’s Central Bank has cut its policy rate by 100 basis points to nine per cent after keeping it at 10 per cent since October last year.
The action signals the Bank of Uganda’s intentions to stimulate growth by making credit more affordable.
This rate cut is expected to be of relief to businesses facing a cash crunch in funding operations or expansion.
Businesses are also struggling with low sales and reduced household spending, which can also get a fillip from the rate cut through consumer lending.
“This policy move is expected to boost already high liquidity levels in the banking sector and this will eventually accelerate credit growth and real economic activity,” said Adam Mugume, Executive Director for Research at Bank of Uganda (BoU).
The cut deviated from the soft monetary policy adapted since last year which led to slight reductions in interest rates and increased liquidity levels in the local interbank market, a window used by commercial banks to fix temporary cash flow problems.
However, growth in lending to the private sector is still below the peak 20 per cent of 2009 and 2011.
“The economy continues to grow but at a slowing rate. Economic activity seems to have slackened in the first half of 2019 compared to the second half of 2018,” the Bank of Uganda said in the latest monetary policy statement.
Besides the signal from the lower CBR, more lending could be unlocked as banks cut borrowing rates on the back of reduced funding costs in their operations.
A drop in the key policy rate usually leads to declines in benchmark interest rates incurred by banks seeking short term funds for their operations and this in turn, yields discounted borrowing rates charged by lenders.
However, it carries the risks of capital flight among offshore investors discouraged by lower interest rates and depreciation of the local shilling against the US dollar.
“We do not expect the rate cut to affect the exchange rate negatively due to offshore investor actions. “Besides, the yields on Uganda government debt remain more attractive compared to other African markets except for Nigeria and Ghana that also bear some currency risks,” said Dr Mugume.
The proportion of offshore debt holdings has dropped to about Ush1 trillion ($269.6 million) out of Ush17 trillion ($4.58 billion) in outstanding treasury bills and bonds.
However, sector players were more cautious.
“I feel the Central Bank wants to compel commercial banks to increase their lending levels despite significant liquidity seen in the interbank market. I also feel the exchange rate may suffer for some time due to the policy rate cut,” noted Phillip Sendawula, Chief Finance Officer at Exim Bank Uganda Limited.