Uganda’s Central Bank threatens cap on Bank interest rates

The year 2020 has been a very traumatic year for the global economy following the impact of COVID-19 (coronavirus). Many African economies have had to face hyperinflation due to several months of economic shutdowns as governments imposed strict lockdown measures with aims to prioritise the health of citizens.

However, many governments have had to adopt new financial policies to help buffer the impacts of the pandemic on the economy while reviving economic activities. Therefore, the Bank of Uganda cut its benchmark interest rate by 100bps to 7 percent, on June 8th 2020, aiming to support the economy which has been hard hit by the pandemic.

Similarly, a 100bps power cut in April brought the borrowing cost to the lowest level since 2011.

According to the Emmanuel Tumusiime-Mutebile, Governor of the Ugandan Central Bank, the weighted average lending rate on loans in Uganda rose to 18.8 percent in May from 17.7 percent in April, at a time of economic decline due to lower demand, lower capital inflows, reduced productivity and mass unemployment.

The move was aimed at reviving the economy and reducing the impact of the novel coronavirus. This means that commercial banks were to reduce interest rates on loans in order to see more people, especially entrepreneurs, sign up for loans and invariably cause economic rebound.

But the banks have not obeyed the order to implement the new lending rate. Therefore, in a letter dated July 7 to commercial banks, the apex bank governor expressed his displeasure as commercial banks have not acknowledged that reduction with cuts of their own.

In response to their failures to reduce lending rates, the BoU has threatened to cap the interest rates commercial banks can charge borrowers. According to Tumusiime-Mutebile, the apex bank is considering “invoking a law that allows it to determine maximum and minimum rates that “financial institutions may…impose on credit extended in any form.”

When the central bank of a country introduces certain financial policies, the aim is usually to regulate the activities of financial institutions and support continued economic growth. It is also done to help businesses navigate through financial pressures that could cripple production activities.

Sometimes, to mitigate the negative risks of trade policy and weak global growth triggered by unexpected occurrences, a country’s central bank steps in with new monetary policies.