Bank Of Uganda further cut its benchmark lending rate to its lowest level ever on Tuesday in a move experts say is intended to encourage lending to small businesses.
The Central Bank noted that commercial bank lending rates for small businesses remained very costly despite recent policy easing.
Policymakers cut the rate by 50 basis points to 9 per cent, the lowest level since the country began setting rates as part of an inflation-targeting monetary policy in 2011. Inflation slowed to 3 per cent last month, mainly due to a drop in food prices.
Governor Emmanuel Tumusiime-Mutebile said growth of private sector credit remained “below historic levels” and the cost of credit for micro- and small loans was still relatively high.
“A cautious easing of monetary policy is warranted to further boost private sector credit growth and to strengthen the economic growth momentum,” he told a news conference.
The economy was expected to expand by 5.5 per cent in the 2017/18 (July-June) fiscal year, before averaging 6.3 per cent over the next five years, mainly due to public investments, domestic consumption and robustness in the farm sector.
Officials are eager to return growth to its potential of about 7 per cent, which it enjoyed in the 1990s and early 2000s, to help absorb growing ranks of unemployed youths into jobs.
The government is investing in a series of big infrastructure projects, like hydropower plants and expressways, to improve the business environment and attract investment.
Some of the investments are expected to support crude oil production, which is set to commence in 2020.
Tumusiime-Mutebile said ongoing public investments could substantially boost output, but their implementation risked potentially crowding out private sector borrowers.
David Bagambe, trader at Diamond Trust Bank, said the move would likely accelerate the lowering of private sector lending rates. He however cautioned that the impact of the cuts in the economy would take time.