- We at Fitch Solutions expect that the BoU will maintain its hawkish stance after hiking the policy rate by 100 basis points to 7.50% in June 2022.
- We expect a robust economic backdrop will provide room for additional 75bp hikes in 2022 and 2023, with the BoU seeking to bring headline inflation back to within the medium-term target of 5.0%.
- Risks to the outlook are tilted towards the upside: should inflation accelerate beyond our projections, the BoU will likely hike the policy rate more aggressively over the coming quarters.
We at Fitch Solutions expect that the Bank of Uganda (BoU) will maintain a hawkish stance after hiking the policy rate by 100 basis points (bps) to 7.50% in June 2022. The monetary policy committee described the June 1 hike - the first rate rise since October 2018 (see chart below) – as an attempt to slow headline inflation, which had accelerated beyond the BoU’s medium-term target of 5.0% to a 59-month high of 6.3% y-o-y in May. We expect inflation will continue to accelerate over the coming months and end 2022 at 7.1% y-o-y amid elevated global prices of fuel and agricultural products. Against this backdrop, we expect the BCC to hike the policy rate by a further 75bps to 8.25% in H222.
Bank Of Uganda To Implement Further Hikes In 2022-23
Uganda - Central Bank Policy Rate, %
We expect that elevated inflation will encourage further monetary tightening. We expect inflation will remain above the medium-term target over the coming months and average 6.7% in 2022 as elevated global oil prices (Brent crude averaged USD114.0/bbl in May 2022, 67.0% higher y-o-y) lead to an increase in domestic fuel prices. Rising pump prices will also likely increase costs for businesses, translating to higher prices throughout the economy. Moreover, the Ugandan shilling depreciated by 2.4% y-o-y to UGX3635.1/USD in May 2022, increasing imported price pressures for goods such as cereals and pharmaceutical products, and so further incentivising the BoU to tighten monetary policy to prevent the headline rate from substantially accelerating.
Inflation To Accelerate Over The Coming Months
Uganda - Inflation, % y-o-y
A robust macroeconomic outlook will provide the central bank with room to tighten monetary policy. We believe Uganda’s economy has maintained considerable momentum following the easing of Covid-19 restrictions in January 2022. Indeed, the Ugandan Purchasing Managers Index (a measure of economic activity) stood at 51.5 in May 2022, the tenth consecutive month above the 50.0 threshold, which signals improving business conditions. We expect Uganda to record real GDP growth of 4.8% in 2022 (just below the 2015-2019 average of 5.5%), which will allow the BoU to maintain its focus on price stability.
Economy Retains Momentum, Despite Headwinds
Uganda - Stanbic Purchasing Managers Index
Tightening Cycle Set To Continue In 2023
We expect the BoU will hike the policy rate hold by a further 75bps to 9.00% in 2023. We expect domestic inflation will remain above the medium-term target amid ongoing disruptions to supplies of food and fuel – we forecast price growth to average 6.2% in 2023. At the same time, we expect that stronger real GDP growth of 5.9% in 2023, supported by rising foreign investment into the nascent oil sector, will reduce the need to support the economy. Reflecting these factors, we expect the BoU will further tighten monetary policy.
Risks to the outlook are tilted to the upside. Should further disruptions to global supply chains result in domestic shortages of essential items, inflation would likely accelerate beyond our expectations. In this eventuality, we expect the BoU would implement more aggressive hikes over the coming quarters to ensure broad price stability.
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