In brief
- The Bank of Uganda (BoU) maintained the Central Bank Rate (CBR) at 10.0% at its April MPC meeting. This was the third consecutive neutral policy stance after the apex bank front-loaded 350bps hike between July and October 2022.
- We have the sense that with a myriad of uncertainties clouding the inflation outlook, the policymakers opted not to include an explicit inflation guidance but a more general statement, “…inflation will continue decelerating and converge to the 5% target by the end of 2023”. Not to lose the forest for the trees, the policymakers’ reaction function suggests that inflation may have peaked.
- Compared with an expansion of 9.2% y/y in 3Q2022, real GDP growth moderated to 4.4% y/y in 4Q2022 on account of a decline in industrial output and deceleration in services output growth. The policymakers expect growth to be rangebound between 5.5% – 6.0% band until FY26, before reverting to its long-term trend of 7.0%.
- The Ugandan Shilling (UGX) has been stable (-0.7% YTD) with volatility easing compared to 2022 performance. FX reserves have remained steady at USD 3.6bn; down from USD 4.5bn in April 2022. Increased external debt servicing costs and a reversal of foreign portfolio flows have stifled build-up of the FX buffers.
- The FY23 supplementary budget is expected to be passed in Parliament later this week. With a continued shortfall in revenue outturn, the proposed UGX 3.0tn additional expenditure will result in a widening of the fiscal deficit from the base case.
- Yields have jumped 24bps YTD, on average, across the yield curve, more pronounced at the tail end. We anticipate yields to remain rangebound following the neutral policy rate decision and the reversal in the rally that played out between late 2022 into mid-Feb 2023. The expected passage of FY23 Supplementary budget with an upward tilt suggests investors will pencil in higher real rates in the remainder of the fiscal year, whereas disinflation outlook implies lower premium.
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