Stockholm (Ekonamik) – Of the central banks meeting this week, only the Bank of Uganda decided to cut its main policy rate, bringing it down to 9%. There were four other monetary policy meetings from the central banks of Israel, Peru, Serbia and Sri Lanka.
The 100bps Ugandan rate cut was motivated by slower economic growth and uncertainty. “Economic activity seems to have slackened in the first half of 2019 compared to the second half of 2018,” notes the statement from monetary policy meeting. “The outlook is uncertain, particularly as a result of the unfavourable global economy.”
However, the true culprit the cut was the need to facilitate the country’s twin deficits. “Moreover, a combination of widening fiscal and current account deficits, coupled with public sector domestic financing needs, could exert pressure on the lending interest rates leading to further moderation of economic growth.”
The decision was supported by a belief “that the benign inflation outlook provides room for a reduction in the policy rate to support economic growth,” according to the central banks.
According to Reuters, Uganda’s year-on-year headline inflation declined to 1.9% in September from 2.1% in August, driven by lower food prices, a stronger local currency and subdued consumer demand. However, if left unchecked, the continued rise of external debt could lead to a devaluation of the currency and an increase in inflation.