On April 8, 2024, the Bank of Uganda’s Monetary Policy Committee (MPC) announced an increase in the Central Bank Rate (CBR) to 10.25%. This decision was made in response to inflation indicators from the Uganda Bureau of Statistics for March 2024, which revealed a slight decline in headline inflation to 3.3% from 3.4% in February 2024.
The decrease in headline inflation was primarily attributed to a reduction in food crop inflation, which declined to -0.4% from 0.5%. However, services inflation experienced a slight increase to 5.5% from 5.4%, while core inflation remained steady at 3.4%. Despite these fluctuations, the prevailing conditions of reduced aggregate demand and increasing supply have mitigated strong inflationary pressures.
The recent increase in the CBR has had a spillover effect of stabilizing the shilling exchange rate. However, the shilling remains vulnerable due to outflows of short-term foreign investor funds and strong domestic demand by corporates. The weakening of the shilling could significantly impact domestic prices, potentially pushing inflation higher.
Forecasts indicate that inflation may rise to between 5.5% to 6% within the next 12 months, with a return to the medium-term target of 5% anticipated in the second half of 2025. Upside risks to the inflation outlook persist, including geopolitical tensions, potential energy price hikes, and tighter global financial conditions.
Despite the economy’s resilience, recent high-frequency indicators suggest a slight downturn in near-term growth. Uncertainty surrounding the global economic outlook and domestic financial conditions could dampen domestic demand. However, economic growth for FY 2023/24 is forecast at approximately 6%, with subsequent years expected to hover between 5.5% to 6.5%.
In light of persistent upside risks to inflation, the MPC deemed it necessary to tighten monetary policy further to anchor inflation around the medium-term target of 5%. Consequently, the CBR has been raised by 25 basis points to 10.25%. This decision aims to balance the need to contain inflation while supporting sustainable economic growth essential for Uganda’s socio-economic transformation.
The MPC stands prepared to respond to any materialization of identified risks, indicating a proactive approach to managing economic challenges.
