The high interest rate environment appears to be abating rather sluggishly leading to an increase in bank lending according to Prof. Emmanuel Tumusiime-Mutebile, the Governor Bank of Uganda.
While issuing the Monetary Policy Statement for November 2013, Prof Mutebile revealed on Monday that lending to businesses and other private sector players has been on the rise for the last four months.
On average, interest rates declined to 22.5percent in September 2013 from 23.1percent in August 2013. Additionally, economic indicators from the first quarter of 2013/14, according to BOU, point to increased economic activity as a result of government expenditure on roads and energy infrastructure.
In the energy sector, Karuma and Isimba projects were commissioned. Both projects, among others attract private sector contractors who borrow and spend. Such economic activity is said to be a boost to the economy as it creates demand.
The interest rates however, remain a sticky matter, especially for borrowers as rates are still above the 18percent average rate reported in the period before August 2011; when inflation was on the rise. Inflation has since abated to single digits – 8.1percent in October 2013 – whereas the benchmark lending has been at a 12percent average for the year 2013.
The banks however continue to lend much higher than the benchmark lending rate, slowing credit uptake. Mutebile says interest rates by commercial banks should be closer to the BOU rate. Bankers, however, continue to insist that the cost of money is still high. For the second month in a row, the bank maintained the rate at 12percent, remaining cautious due to fears that increased demand could lead to a rise in inflation.
Dr Adam Mugume, the Director Research at BOU further explained that the uncertainty in the trend of rising prices is due to the fact they cannot predict the seasonal factors that are likely to affect food prices and global oil prices.
Dr Mugume further adds that BOU has to be cautious between now and the harvesting period.