Market expects stable rate as inflation eases

Bank of Uganda is expected to keep the rate of its key monetary instrument steady after the of rate inflation eased in the month of October.

BOU will make an announcement on the Central Bank Rate for the month of November, with some experts in the market expecting an unchanged rate, but most importantly with a wider section of the traders and public hoping the rate will boost credit growth as the festive season begins.

“Considering the fact that there was a marginal decline in inflation, an indication that inflationary pressures are tapering off, one could take a view that BOU is almost at the edge, ready to lower the CBR,” said Stephen Kaboyo, managing director at Alpha Capital.

“Nevertheless, I continue to believe that the Central bank would need to see a solid trigger factor; a 0.3% drop in inflation may not do it. In absence of this, BOU may validate the markets expectations for a stable policy rate.”

The CBR, which influences the price of credit, goods and services in the market, has stayed steady at 12 per cent from September. October saw a dramatic fall in inflation after more food supplies reached the markets.

Headline inflation, which measures the general increase of prices of goods and services, fell to 8.1 per cent in October, down from 8.4 percent in September.

Core Inflation, which measures the increase in the prices of goods and services, save for utilities and food, decreased to 7.2 percent in October from 7.4 in September.

The Uganda Bureau of Statistics (Ubos) says “the decline in inflation was driven by a reduction in prices of most fresh vegetables, dried beans, and milk” in most parts of the country as a result of attributed to increased supplies.

The inflation jump had been triggered by food shortage due to the drought that hit the country earlier this year, which affected farmers’ harvests. BOU responded by raising the CBR by a percentage point to limit borrowing and spending, which would have further escalated the inflation.

Last month, food inflation fell to 14.3 per cent from 16.2 per cent in September. But the central bank was confident that the rise in inflation was temporary and would not affect the economy.

In the non-food category, however, Ubos says, monthly increases in prices were recorded for petrol, diesel, paraffin, clothing, rent, and telephone tariffs, among others.

“Prices for charcoal and firewood went down…” Ubos says. A bigger size of the population use charcoal and firewood for their energy needs considering that less than 15 per cent of the country has access to electricity.

BOU expects inflation to fall to its target level of five per cent this fiscal year.

amwesigwa@observer.ug