InsightsMacroeconomic updateMonetary PolicyUganda

14 August 2023

Uganda MPC Update : The First Cut Is The Deepest

In brief

  • We foresee the Bank of Uganda delivering the biggest rate cut (200bps) since October 2012, in its upcoming MPC meeting that is scheduled to be held tomorrow 15th August 2023. This rate cut should lower the Central Bank Rate to 8.0% from the current 10.0%. Furthermore, we expect an equal 200bps reduction on the Cash Reserve Requirement (CRR) to 8.0%, to support credit mediation.
  • The policymakers have maintained a neutral stance in the previous three meetings this year, on the back of the cumulative 350bps rate hike delivered in 2022. Inflation outturn (July 2023: 3.9%) has surprised the monetary policymakers’ expectation, falling below the end-3Q2023 forecast of 5.0% as per the June 2023 MPC meeting, strengthening our “cut” view.
  • Notwithstanding the restrictive monetary and fiscal policy stance since FY23, both headline and core inflation outturn has surprised the policymakers’ expectation (end 3Q2023: 5.0%). Against the IMF’s estimated average neutral rate of 4.25%, we deem the current ex-post real policy rate of 6.1% as ‘tight’. As such, a 200bps cut will be appropriate to bring monetary policy back to neutral levels with our expectation of lower inflation in the near term.
  • With BoU broadly staying from USD sales, FX reserves jumped USD 504.94mn m/m to USD 4.1bn in June 2023, supporting the Ugandan Shilling (UGX) to +1.3% YTD against the USD as of 9 August 2023. On the back of the World Bank statement halting new public financing following the enactment of the Anti-Homosexuality law, the UGX shed 1.9% on Thursday 10 August 2023, erasing the hitherto modest YTD gains but steadied in Friday’s session.
  • On a YTD basis, Ugandan rates have adjusted downwards by an average of 130bps across the curve. That gives some wiggle room for a further 70bps average decline to fully bake in the upcoming 200bps rate cut in our baseline. At these levels, we foresee limited upside in Ugandan rates in the near-term, but we will be assessing attractive entry points.

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