Economic Analysis - Easing Cycle At An End Despite Falling Inflation - 24 JULY 2017

BMI View: Although we believe that inflation will continue to decline over coming months, the Bank of Uganda has likely reached the end of its easing cycle given low real yields and little pass through from cuts already made to commercial bank lending rates. We are forecasting that the policy rate will remain at its current level of 10.00% for the remainder of 2017 and through 2018.

After cutting the benchmark central bank rate by 100 basis points to 10.00% in June, we believe that the Bank of Uganda's (BOU) monetary policy committee (MPC) will hold the policy central bank rate (CBR) at its current level for the remainder of the year and for 2018. Indeed, although we expect inflation to fall over the coming months on the back of lower oil prices and slowing food price growth, we believe that, in the context of relatively low real yields, the MPC will hold off from making further cuts as it waits for CBR reductions made over the last 12 months to pass through to commercial bank lending rates.

Inflation To Continue Declining ...

Low Real Yields And Little Pass Through To Commercial Bank Lending Rates Will Forestall Further Cuts
Uganda - Interest Rates And Inflation
Source: Bank of Uganda, BMI. *Real interest rate defined as 91 T-bill yield minus inflation.

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