Central Bank warns of pass through effects of US inflation, Ukraine conflict  

Bank of Uganda (BoU) has sounded the alarm, urging Ugandans to be vigilant in the coming months as it manages economic turbulence. Some of the shocks to Uganda’s economy can be traced to changes in President Bidens’ America, the Central Bank said.

In its Monetary Policy Committee (MPC) report for June 2022, the Central Bank pointed out that the shilling lost 2.6% of its value to the US dollar month-on-month and 2.3% year-on-year in May 2022.

“This was at the back of bearish sentiments occasioned by tightening of monetary policy by the US Fed causing nervousness amongst the offshore investors in Uganda,” the Bank said.

“In addition, the deteriorating terms of trade has caused a stronger demand for US dollars amongst the energy companies and other importers. To curb the volatility, BoU intervened in the interbank foreign exchange market (IFEM) by selling dollars and stayed purchases of dollars to accumulate reserves,” it added in the report.

The rapid weakening of the Uganda shilling against the US dollar coupled with rising domestic food and energy prices have worsened the inflation outlook since the April 2022 forecast round. Thus, higher business costs are likely to spread into consumer prices, thereby pushing inflation higher in the coming months.

Consequently, the Bank points out, annual headline and core inflation are now forecast to average 7% and 6.1%, respectively, in 2022, which is higher than earlier projections.

Inflation is expected to peak in the first quarter of 2023 and converge back to the 5% medium term target in the middle of 2024.

“The inflation outlook is very uncertain and highly dependent on the evolution of the Russia-Ukraine war and possible measures to contain the conflict. However, the BoU assesses that the balance of risks to the inflation outlook is tilted to the upside,” the Bank said.

It pointed out that growth in economic activity is softening as signalled by the quarterly growth of the Composite Index of Economic Activity (CIEA). The CIEA growth slowed down to 0.8% in the quarter to April 2022 down from the 2.4% recorded in the quarter to January 2022.

The slowdown in economic activity is more pronounced in the industry and services sectors as businesses become less optimistic while consumers express more pessimism at the back of higher price pressures.

GDP growth is now projected in the range of 4.5-5.0% which is much lower than 5.5-6.0% projected in April 2022. The main factors underlying this downgrade include slowing external demand at the back of higher commodity prices and the growth slowdown in china, deteriorating domestic inflation and tightening domestic and global monetary conditions.

Graphic indicating highlights of the June Monetary Policy Statement

The risks to the growth outlook are tilted to the downside due to the weaker-than-expected global growth, further escalation of geopolitical conflicts, persistent global supply chain disruptions, heightened global economic uncertainty, higher inflation which is dampening global and domestic consumer confidence and prolonged weak growth in private sector credit.

The Monetary Policy Committee (MPC) assessed that the risks to inflation were significantly tilted to the upside. Based on the worsening outlook to inflation and balance of risks, the MPC decided that increasing the benchmark Central Bank Rate (CBR) by 1 percentage point to 7.5% in June 2022 would be consistent with meeting the inflation objective of 5% sustainably in the medium term.

“The BoU is committed to continue raising the CBR until inflation is firmly contained around the medium-term target,” the Central Bank said.

Inflation is increasing rapidly and is spreading broadly across the basket of consumer goods and services. The annual headline and core inflation rose to 6.3% and 5.1% in May 2022 from 2.7% and 2.3% in January 2022, respectively.

The spike in global commodities prices at the back of supply-demand imbalances that were caused by the Covid-19 pandemic related disruptions in global supply chains and heightened by the Ukraine conflict are the main underlying sources to the price pressures.

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