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INFLATION: Experts question new BOU measures

Dr. Fred Muhumuza 

Kampala, Uganda | THE INDEPENDENT | Experts have voiced contrasting views on how the Bank of Uganda is using its policies to control rising inflation. Many argue that the measures could hurt the economy more, at least in the short run.

The Central Bank on Tuesday raised its base interest rate, the Central Bank Rate (CBR) in a bid to increase the cost of money to commercial banks so that the banks raise interest rates.

This in the end should discourage households and businesses from borrowing, and reduce the money held by the public.

The action and the motive of the Bank have raised concerns and questions as to the possible effects on the economy and in particular the personal, household and business incomes of Ugandans.

The Monetary Policy Committee of the Bank of Uganda unusually sits after every two months and the last meeting was in June, to determine the direction of the cost of money for the next two months.

However, following the rise in headline inflation from 6.3% at the end of May to 6.8% at the end of June, the BOU Deputy Governor Michael Atingi-Ego, called a ‘special’ meeting of the committee to take further action to control the inflationary trend.

The increase in the CBR just after a month, and by a whole percentage point has set the public worried over the possible effects in the next months, especially when it comes to seeking borrowing.

“Next is the commercial banks’ reaction to increasing interest rates on all the existing loan portfolios. More suffering as little purchasing power will be the result.  Tightening the belts indeed,” says Moses Otai, the Country Director, Child Fund.

Others expressed worry that the monetary tightening is coming at a time when the government should be making the availability of capital a priority, especially for small and medium businesses.

This would hold the economy until the situation improves, according to them.  But instead, especially small and micro enterprises especially in Kampala have been disputed by high costs of inputs and transport, calling for government measures to ease the situation.

“This is quite a huge increase, and I’m afraid it will undermine the capitalization of already struggling businesses, couldn’t we have applied other inflation-curbing measures?” wondered Roger Kasule, a business consultant at Golazo Business Ltd.

On the BOU CBR policy, some are of the view that the banks are usually fast to increase the interest rates, but are not willing to reduce them when the regulator cuts its base rate.

However, experts say the bank uses the hiking of the CBR because excessive inflation can rapidly reverse all the economic gains, erode the value of savings and eat up the profits of the private sector.

“It is true that higher rates make borrowing more expensive. When credit is expensive, this influences consumer demand for goods and services as well as investments. The outcome helps to cool inflation,” says Steven Kaboyo, the Executive Director, of Alpha Capital Markets.

The former Director of Financial Markets at the Bank of Uganda says that this is the main reason why BOU is taking such radical steps even if they end up hurting the economy in the short run.

In the last few months, BOU has also intensified the use of government securities and selling of foreign exchange to ‘mope- up excess liquidity in the market.

On Tuesday, for example, BOU mopped out 344 billion shillings through an overnight Repo.

Under the Repo basis, Treasury Bills are sold to the public and bought out the following day or after two days, at a higher interest rate.

This has been the practice since inflation started rising faster over the last four months.

Economist, Dr Fred Muhumuza advised the central bank against measures that might suffocate the private sector by denying them liquidity.

Muhumuza says measures like hiking the CBR would work if the inflation was ‘monetary’, or caused by too much money in circulation.  He advises instead that commercial banks should be encouraged to lend more cautiously but not raise interest rates.

He says instead, that the current trend is mainly a result of what is happening in the global economies, unlike crises which are at times caused by more money chasing fewer goods.

This echoes the views and feelings among the public that money is scarce at the personal and household level because of the high prices of essential goods and services like cooking oil, sugar, soap, maize flour and wheat, as well as services like transport.

Muhumuza says it is not right to curtail business operations by limiting the availability of cash, which would otherwise keep them running through the hard economic times.

He says instead, the Bank panicked and applied the CBR, which they raised too fast.



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