UGANDA, Kampala | Real Muloodi News | Bank of Uganda raised the Central Bank Rate (CBR) by a percentage point on Thursday to 7.5 per cent, in an effort to combat rapidly increasing inflation.
While addressing a press briefing in Kampala, Michael Atingi-Ego, the Deputy Governor at the Bank of Uganda, told reporters that inflationary pressure had reached 6.3 per cent in May, up from 4.9 per cent the previous month. This represents the biggest jump in inflation Uganda has seen in five years, necessitating the tightening of the monetary policy to calm prices.
The Central Bank Rate had been kept at 6.5 per cent since June 2021, when inflation remained below the target of 5 per cent.
In its Monetary Policy Committee statement, Bank of Uganda said that while the inflationary pressure are likely to be temporary, the worsening economic outlook and risks ahead have motivated a revision in the CBR to contain demand pressures amid increasing demand versus subdued supply.
Bank of Uganda also announced that “it will continue to raise the CBR until inflation is firmly contained”.
Dr Atingi-Ego told reporters in Kampala that the price of essential commodities such as cooking oil and soap, food, fuel and transportation had risen sharply.
He said supply vs demand imbalances caused by the COVID-19 pandemic and intensified by the Russia-Ukraine conflict are the main underlying causes of the broader price pressures.
“The weakening of the Uganda shilling against the US dollar, coupled with rising food and energy prices, have worsened the inflation outlook since the April 2022 forecast round. Higher business costs are likely to spread into consumer prices, thereby pushing inflation higher in the coming months,” he said.
Consequently, Dr Atingi-Ego said, core inflation is now forecast to average 6.1 per cent in 2022, which is higher than earlier projections.
The Bank projects inflation to peak in the second quarter of 2023, before gradually declining to the medium-term target of 5 per cent by mid-2024.
However, Dr Atingi-Ego warned that the inflation outlook remains significantly uncertain, with the balance of risks tilted upside.
The risks that could keep inflation above-target include:
- Global inflationary pressures amidst persistently higher global food and energy prices. The Russian-Ukraine conflict continues to strain supply chains and stoke international commodity prices.
- Trade restrictions by some countries and stringent containment measures against new Covid-19 virus strains in Asia are adding to the disruptions to global supply chains.
- A stronger tightening of monetary conditions by advanced economies aiming to control inflation could intensify portfolio outflows from frontier markets like Uganda, thereby further weakening the shilling exchange rate.
- Higher prices in the global markets that would further increase the demand for foreign exchange (US$ in particular) required to purchase the same quantity of goods, could further weaken the shilling exchange rate.
Dr Atingi-Ego also said the prospects of domestic economic growth in Uganda have diminished due to the adverse global economic developments and higher inflation. Previous optimism for economic recovery following the removal of pandemic restrictions in January 2022 has been dampened.
Therefore, he said, the economic growth outlook is projected in the range of 4.5 to 5 percent in 2022, which is lower than the previous projections of 5.5 to 6 per cent as of April.
However, he noted that in the medium-term the economy is expected to grow between 6 percent and 7 percent supported by public and private investments in the oil sector.
What Does This Mean for Uganda’s Property Market?
The pain from Uganda’s rising inflation and skyrocketing fuel and food prices is likely to squeeze consumer incomes, making it difficult for people to save or invest. Coupled with rising lending rates, the ability for many people to purchase property will be stifled.
It is also becoming more expensive to build. Cement prices have skyrocketed from USh28,000 previously to USh40,000, which is almost a 40 per cent jump.
Therefore, the likely result will be a slow-down in the growth of the housing sector.
However, according to economist Prof Augustus Nuwagaba of Makerere University, the rising inflation will do little to push property prices down.
“The rise in inflation rate leads to depletion/erosion of the liquid assets, which is not good for people and the economy at large. It is only land and buildings which may not experience erosion in value,” Prof Nuwagaba explained.
“The rise in inflation affects the purchasing power of people which results in slowdown in economic activities and may translate in slower economic growth,” he adds.
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