Home Africa Twin Deficits Pressure BoU to Cut

Twin Deficits Pressure BoU to Cut

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.”

- Advertisement -

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.

Image by Graham Hobster from Pixabay

Filipe Wallin Albuquerque
Filipe Wallin Albuquerque
Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.

Latest articles

Thriving on Covid-19 Challenges

Stockholm (Ekonamik) - Digitalization has certainly mitigated the impact of COVID-19 on businesses, economies and personal lives. After all, digitalization offers the vital infrastructure...

The Battle of Cheap and Expensive

Stockholm (Ekonamik) - The spread of COVID-19 triggered panic among investors in the first quarter of the year and sent markets reeling and company valuations...

Denmark: A Relative Success Story or Too Soon to Tell?

Stockholm (Ekonamik) - Along with a handful of smaller European countries such as Austria and the Netherlands, Denmark is one nation that appears to...

Challenges and Opportunities in Frontier Markets

Stockhom (Ekonamik) - Given the coverage that Europe and the USA have received regarding the effects of COVID-19, it is easy to forget about...