Uganda Banks cautious on lending rate reduction

Borrowers will have to wait a while longer to realise the effect of a 1% drop in the Central Bank Rate as banks weigh the pros and cons of adjusting their lending rates.

Prime lending rates have remained at an average of 27% since March, having declined from highs of 30% at the height of inflation in December.

“Lending rates will definitely go down. However, the pace will vary from bank to bank. Banks whose rates are at 24% (below the average) may not make immediate re-adjustments,” said Anthony Kituuka, the head of corporate banking at KCB Uganda.

On the other hand, banks with a higher-than-average rate of 29% may be forced to reduce rates, he added.

The Central Bank eased the June benchmark rate to 20% after holding it at 21% for three straight months as annual headline inflation fell for seven consecutive months.

Headline inflation has since fallen to 18.6% from highs of 30.5% in October, largely due to subdued demand by a tight monetary policy and increase in food supplies to markets.

AR Kalan, the Crane Bankboss, noted that the bank was still watching the financial environment, taking into account market forces of demand and supply before it can ease rates.

Analysts predict that a shift in lending rates by the big four commercial banks; Stanbic, Standard Chartered, Barclays and Centenary was the likely trigger for the much-expected industry wide lending rate reduction.

Faisal Bukenya, the Barclays Bank head of market making, said the bank was likely to ease the rates by 1% (from 27%) when a committee to make the decision sits later this month. Varghesse Thambi, the Diamond Trust Bank chief, was optimistic about reducing the lending rate as did Centenary Bank’s Fabian Kasi. They were, however, hesitant to commit to a specific rate reduction.

“There is a meeting scheduled for next week to decide on the banks’ lending rate. We can only be sure of changes to the prime lending rate after the meeting,” said Stanchart publicist, Herbert Zake.

“It is clear that disinflationary momentum in the economy has solidified, providing further evidence of the effectiveness of the tight monetary policy stance effected by the Bank of Uganda,” the governor, Tumusiime Mutebile, said recently.

Razia Khan, the Stanchart Africa regional head of research, noted that Mutebile’s comments signaled a start of a period of monetary easing to boost economic growth after initial estimates showed a fall in growth momentum to 3.2% from 6.7% the year before.

“There is room for further easing….the authorities will be keen to provide some stimulus to growth.

“The likelihood of big growth slowdown due to the Eurozone crisis makes it even more of an imperative for East African central banks to act fast to safeguard growth,” she said.

The New Vision Newspaper
10 June 2012