This archive report was first published on 8 October 2019.
On October 8, 2019, the Bank of Uganda made a significant move to boost economic growth by cutting its policy rate by 100 basis points to 9%.
This decision signals the bank's intentions to stimulate growth by making credit more affordable, which is expected to be a relief to businesses facing a cash crunch in funding operations or expansion.
Businesses are also struggling with low sales and reduced household spending, which can also benefit from the rate cut through consumer lending.
According to Adam Mugume, Executive Director for Research at Bank of Uganda, 'This policy move is expected to boost already high liquidity levels in the banking sector and this will eventually accelerate credit growth and real economic activity.'
However, growth in lending to the private sector is still below the peak 20% of 2009 and 2011.
Despite this, the Bank of Uganda remains optimistic about the economy, stating that 'the economy continues to grow but at a slowing rate. Economic activity seems to have slackened in the first half of 2019 compared to the second half of 2018.'
As a result of the lower policy rate, banks are expected to cut borrowing rates, leading to discounted borrowing rates charged by lenders.
However, this move carries the risks of capital flight among offshore investors discouraged by lower interest rates and depreciation of the local shilling against the US dollar.
