Abstract
2017 Article IV Consultation and Eighth Review Under the Policy Support Instrument-Press Release; Staff Report; and Statement by the Executive Director Uganda
This supplement reports on monetary policy developments since the staff report was prepared. These developments do not alter the thrust of the staff appraisal.
The Bank of Uganda’s Monetary Policy Committee (MPC) cut its policy rate by 100 bps to 10 percent on June 19. This brings the cumulative rate cut to 700 bps since April 2016. The MPC expects core inflation to remain close to the 5 percent target over the next 12-18 months. However, in a change from the April MPC meeting, it now sees a risk that growth in FY17/18 could be weaker than projected. Against this background, emphasizing its stable inflation outlook, the MPC decided to lower the policy rate to support economic activity. They noted that a weaker exchange rate and higher food price inflation are the main risks to core inflation.
Staff encourages the Bank of Uganda to monitor closely food price inflation, exchange rate depreciation, and second-round effects. Staff agrees that, with the rate cut, core inflation is likely to stay within a +/- 2 percent band around the 5 percent target. Staff also agrees that food price inflation, shilling depreciation, and second-round effects that are more pronounced than in the recent past are the main risks to the inflation outlook. The MPC should stand ready to tighten policies if signs emerge that these risks materialize.