Banks keep interest rates on hold

Mutebile maintains CBR at 10% and projects 6.3% growth of the economy

Kampala, Uganda | JULIUS BUSINGE | Borrowers from commercial banks will not experience changes in lending rates in the coming few months after Bank of Uganda maintaining the central bank rate –which influences changes in interest rates market – at 10%.

In separate interviews shortly after Bank of Uganda Governor, Emmanuel Tumusiime Mutebile announced the new rate on Feb.07 – the same as that of December last year – top commercial bank managers said they would continue to watch closely actions being taken by the Governor before making critical decisions regarding their lending rates.

“In this case it is a wait and see situation as we continue to push for private sector credit,” said Edgar Byamah, the managing director at KCB.

He added that banks are important entities in Mutebile’s policy actions because they serve as transmission mechanism through which his actions get response from the market.

Byamah said they anticipated the central bank maintaining the rate at 10% because inflation – which influences the change in the rate – had not gone up sharply.

“As KCB we will maintain a cautious approach,” he said. “We believe that the Central Bank has maintained a cautious approach to keep inflation in check…it is a balancing act.”

Anthony Kituuka, the executive director at Equity Bank said the adjustment in their lending rates is normally influenced by central bank actions and in this case “nothing will change” in response to BoU’s decision.

“Our pricing is still competitive,” he said adding, “But when an opportunity arises with the changing market dynamics we will adjust our lending rates.”

Kituuka said any changes that they will make in their lending rates will be geared towards supporting private sector to borrow at affordable rates to avoid recording non-performing loans.

Bank of Uganda Executive Director in charge of research, Adam Mugume told The Independent after Mutebile’s announcement that the momentum of the private sector credit (PSC) growth would continue following the new CBR pronouncement.

“It is a question of balancing,” he said. He said PSC was currently growing at 11%, higher than 0.8% per annum recorded in 2016. But the 11% is lower than the historical trend of 25% registered in the larger period before 2011.

Currently the average commercial bank lending rate for prime borrowers stands at 20.3% up from 19.3% in the quarter to September 2018 when the CBR was 9%.

Meanwhile, the private sector that has over the years complained about the high cost of doing business partly due to high cost of lending did not welcome Mutebile’s announcement.

The Kampala City Trader’s Association (KACITA) Chairman, Everest Kayondo whose association houses 200, 000 members said “nothing is going to change”.

“It is no longer the CBR that is determining the interest rates in the market,” he told The Independent.

Instead, he said, continued borrowing by government in the domestic market was largely to blame for the high interest rates.

The government currently borrows from the domestic market through the central bank by selling treasury bills and bonds at rates ranging between 10-15%.

He said that government is favored in the credit market largely because his group is described as a ‘risky borrower’.

“Traders are borrowing yes but they are not enjoying the lower interest rate,” he said. Unfortunately, Kayondo said his group has to painfully borrow from banks at current high interest rates because there are limited viable options of raising capital to support business operations.

Mutebile’s views

While announcing the unchanged rate of 10% at Bank of Uganda headquarters in Kampala, Mutebile said his decision was made after assessing that the risks to the projected inflation path were roughly balanced.

The January 2019 consumer price index data from Uganda Bureau of Statistics (UBOS) indicates that inflation remains relatively subdued although annual headline inflation rose from 2.2% in December 2018 to 2.7% in January 2019.

UBOS and BoU officials maintain the view that inflation is still contained, supported by low food inflation which has averaged minus 2.2% since the beginning of the FY2018/2019. The other supporting factors are; the decline in international oil prices and a stable exchange rate.

Meanwhile, annual core inflation – the target for Mutebile’s monetary policy – rose from 2.8% to 3.4% during the same period.

Going forward, Mutebile said the medium-term (2-3years) inflation outlook remains relatively unchanged from the December 2018 round of forecasts, with inflation projected to converge to the BoU’s target of 5%.

However, he said that its outlook in the intermediate period has improved, largely driven by a relatively stronger shilling and good crop harvest.

Headline and core inflation are forecast to peak at 5.5% and 5.3% in the first quarter of 2020, which are lower than the previous estimates by 0.6 and 1.1 percentage points respectively.

“There are nonetheless upside risks to the outlook including the future direction of food crops prices; the path of the exchange rate which in part is contingent on external economic environment and ensuring demand pressures on account of the positive output gap.

Strong economy

Mutebile used the press conference to announce that the economy is projected to grow by about 6.3% in FY2018/19, higher than the 5.7% the previous year.

He said that growth would remain on a steady growth trajectory over the coming years, with output trending above potential.

This, he said, would in part be supported by his accommodative monetary policy stance and the resultant favorable financial conditions, fiscal impetus and multiplier effects of public infrastructure investments.

The other factors have to do with ensuing strong domestic demand conditions and improved agricultural performance.

Still, Mutebile said, there are risks to this growth projection including weather-related constraints and challenges relating to financing of public investment programmes in addition to escalating global trade frictions and lower than anticipated global growth.

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