The primary policy objective of the Bank of Uganda’s monetary policy is to hold annual core inflation to a medium term target of 5 percent. A secondary policy objective of monetary policy is to ensure that real output is as close as possible to the economy’s potential level.
In July 2011, the Bank of Uganda reformed its monetary policy framework to meet the challenges of macroeconomic management generated by the transformation of the economy over the last 10 years, and in particular the rapid growth and diversification of the financial system. The reform entailed the introduction of an inflation targeting lite (ITL) monetary policy framework, which replaced the previous framework which involved the targeting of monetary aggregates.
Under the ITL monetary policy framework, the Bank of Uganda sets a policy interest rate, called the Central Bank Rate (CBR), which is intended to guide short-term inter-bank lending rates and thereby influence the marginal cost of funds for commercial banks. The BOU uses regular interventions in the money market to ensure that the 7 day interbank rate is as close as possible to the CBR.
The CBR is the operating target of monetary policy. It is set once every two months and is publicly announced, at a press briefing held immediately after the rate setting meeting, so that it clearly signals the stance of monetary policy going forward. The CBR is set at a level which is consistent with achieving the objectives of monetary policy.