How a change in CBR affects your budget
When the president gave the directive to fully reopen the economy after two years caused by the Covid19 lockdown, everyone was thrilled to start again. However, this received a surge in cold water when fuel prices began to skyrocket, causing a shake-up in the economy.
In response, the Bank of Uganda (BoU) raised the Rate of the Central Bank (CBI) on a monthly basis. According to a statement from BoU, in the Monetary Policy Committee of August 12, 2022, the central bank increased the CBI by 50 basis points to 9 percent from 8.5 percent in July, 7.5 percent in June and 7 percent in April. This was driven by spending-pushing inflation, which is 7.4 percent from 4.1 percent in April.
The CBR is a tool that the Central Bank uses to control the money entering the economy by increasing or decreasing it.
Ronald Mukasa, a personal finance adviser, says it's about whether it's more profitable to lend to the government or individuals. Everything that happens with the course affects us. However, how does this increase affect the household?
This is due to rising inflation and the goal is to reduce the amount of money in circulation to curb the growth of inflation. Therefore, it will affect the overall performance of the business.
“Businesses won't have enough money to fulfill their orders or expand,” says Charles Oxici, chief executive officer of Enterprise Uganda.
At the same time, an ordinary person who would like to open, say, a branch of a school in the neighborhood will not be one who denies households access to closer services. It can be any type of business, as even a corn trader hopes to set up a retail venture in Kisoro while it will not be possible to buy from, say, Kigumba, because there is no liquidity. This affects farmers who would skillfully sell their products, as well as consumers who hoped to buy goods from this businessman who brings goods closer to them.
Jobs also suffer, creating a situation where people are in distress and development is affected because development depends on the investments that occur.
Mukasa says the question is how much can be borrowed because the CBI also affects the interest rate that commercial banks charge their borrowers. An increase in CBR means higher interest rates, and some people have loans with floating rates (not fixed). Therefore, changing the rate affects their interest rate.
“For example, if it pops up, you'll pay more biting, but lowering the rate means a reduced percentage,” he says.
Many Ugandans are in arrears. Some directly with financial institutions and others indirectly where they took out the loan provider.
“With direct debt, in these difficult times of rapid growth in fuel prices, other prices also affect. If your interest rate also rises, it will continue to greatly affect the household budget,” he says.
For example, for someone who wants to take a mortgage and its rate is fixed in the CBR, a higher CBR means a higher interest rate on the loan.
Even when someone uses their own money for construction, they consume services such as buying from a hardware store.
“If that has a loan and its interest rate is high, they're going to pass it on to the customer. In addition, an increase in CBR means an increase in the value of the business, but the owner of this store buys these goods from another business, which will transfer the increased value to the retailer who transfers them to the end user. This makes construction more expensive,” Mukasa explains.
It may also be that their landlord has a loan. Therefore, when the interest rate starts them (landlord), they can also increase the rent. Which in turn affects the business of the store owner. Rents could go up because the landlord is also a retailer's customer somewhere and has to maintain or improve their purchasing power. Thus, higher commodity prices, in turn, will affect them, therefore, increase the rent to meet their needs.
Usually, the household ends up carrying the brunt of this problem. So, households should manage their spending better because at the individual level there is no control over the CBR trend, but it affects you.
“Deal with what you have under control. This requires making decisions such as not taking on more debt. You can also postpone some projects until the environment stabilizes,” says Mukasa.
However, Ocici shares that increasing CBR also means an increase in the deposit interest rate (DIR). DIR is the interest that a bank gives to those who are econoa moment with them, and the higher it is, the more people are encouraged to save. In turn, commercial banks have more money to borrow, but e less money savings.
“Therefore, banking investment instruments, such as bonds, will go up and become more attractive than investing in, say, poultry farming,” he says.
In addition, foreign investors consider such an economy more attractive for investment, since shilling has a higher yield. As this happens, they bring more dollars, and the dollar decreases.
“During this period, foreign investors will flock to the economy, provided that, as a rule, inflation is under control, because sometimes inflation can be created when the government prints more money to service its costs,” he explains.
Still, for a retailer who bought things, say clothes at shs4,000 per dollar rate, when the rate drops, say Shs3,500, they will incur losses.
“No one will buy from you out of compassion. However, if you bought a product at Shs3,500 per dollar and the rate rises, you will sell at a higher rate, thus more profit. You can also rate the products just below who is currently buying them at a higher rate so that you sell more.
That said, it's a window for a limited time before prices level off,” says Ochichi. This variation in the cost of doing business will affect the retailer's costs, thus affecting them home budget. In addition, they will push it towards the consumer who is at the bottom of the purchasing chain, which also affects his purchasing power and increases the cost of living.
Conversely, when the CBR shrinks and more money enters the community, purchasing power improves.