BOU cut the central bank rate (CBR) by 200 basis points to 7%, in June, aiming to cushion the economy and encourage lending to households and businesses battered by the effects of the lockdown. Bank of Uganda Governor, Emmanuel Mutebile (File photo) BUSINESS The warning was contained in a letter by the Governor of Bank of Uganda (BOU), Prof. Emmanuel Tumusiime Mutebile on Tuesday, to all chief executive officers of commercial banks, and copied to the Uganda Bankers Association.
In the letter, which the New Vision has seen, Mutebile said he was disheartened that lending rates were not reducing, despite a raft of reductions to the benchmark Central Bank Rate (CBR) since 2016.
The CBR was slashed by 200 basis points to 7%, the lowest ever, between April and June, to counter the effects of the coronavirus on the economy. However, the weighted average industry lending rates rose to 18.8% in May, from 17.7% in April, against BOU’s signal for a reduction.
The CBR is the benchmark rate at which financial institutions borrow from the central bank. When a bank is facing liquidity (cash) challenges, they borrow money from the central bank or from other banks, using the CBR as the benchmark rate.
The lockdown has adversely affected borrowers’ ability to meet their loan obligations with several commercial banks. Anne Juuko Mutebile’s warning
"Since BOU has aggressively eased monetary policy with an objective of reducing the cost of credit, lending interest rates should be reduced to levels that are consistent with the current monetary policy stance," Mutebile said.
"In view of commercial banks’ reluctance to heed this call, BOU may take redress to section 39 (1) (d) of the Bank of Uganda Act (2000)."
The law allows for BOU, in consultation with the finance minister, to determine maximum and minimum rates that financial institutions may impose on loans.
The sector regulator said the "downward stickiness in lending rates, despite BOU’s accommodative monetary policy" stance could leave more businesses and households suffering from the effects of the COVID-19 pandemic.
"A faster recovery of the economy reduces the likelihood of distress in the financial sector. I, therefore, expect a faster reaction to the CBR reduction by commercial banks," he said. Anthony Kituuka BOU cut the central bank rate (CBR) by 200 basis points to 7%, in June, aiming to cushion the economy and encourage lending to households and businesses battered by the effects of the lockdown.
Lending rates on […]
