BOU’s actions are driven by the objective to maintain short term interest rates within the specified Central Bank Rate (CBR) band. BOU may mop up or inject liquidity to ensure that interest rates remain within the CBR band. The Bank has a number of instruments in its monetary policy toolkit which are used to achieve this objective. These include the following:
BOU uses Repos with tenors of 1 to 7 days to absorb excess money from the banking system. This means that conditions in the market are that money supply exceeds money demand and could be inflationary. BoU borrows money from the banks (gives them a security) and at maturity banks are paid their principal with interest.
BOU offers reverse repo auctions with tenors of 1 to 7 days to provide liquidity in the domestic market. The reverse repo is one of the major tools used for fine-tuning liquidity conditions when there is market-wide tightness and the pricing for this is CBR. The reverse repo had been suspended to allow interest rates to rise amidst a tightening monetary policy stance.
At the inception of the SLF in September 2020, the tenure was up to 7-days aligned to the maintenance cycle. However, this was revised to strictly overnight in May 2022 during periods of foreign exchange pressures to limit the use of the funds obtained from the SLF spilling into the foreign exchange market. Market players access the funds towards the close of business and repayments are to be made at the opening of business the following day. Effectively, the SLF provides funds to meet CRR.
BoU also sells and buys securities in the secondary market with the aim to ensure long-term money supply and demand has minimal effect on the 7-day rate. Securities purchase increases money supply (BoU gives the banks money and gets to own a security) while Securities sale decreases money supply (BoU gets money from the banks and gives them a government security).
The BOU bill is issued by BOU in tenors of 28-, 56-, 84-, and 252-days. The price of the bill is market determined. Early redemption is allowed at the rediscount rate.
The BoU Fixed Term Deposit Facility is offered in flexible tenures, the rates are fixed by BoU, is non-transferable, and no early termination is allowed.
CRR is one of the instruments of BOU’s monetary policy management-alongside other tools. Subject to section 38 (1) of the Bank of Uganda Act, the bank may prescribe for each bank or group of financial institutions the minimum cash reserve balances inclusive of vault cash which may be required to be maintained in the form of deposits at the bank or any other method laid down by the bank. In June 2022, the Bank revised the CRR by 2 percentage points from 8 percent to 10 percent.
BOU approved the FX swap as an additional monetary policy instrument. The FX swap is similar to the repurchase agreement with only the difference of having the foreign exchange as the underlying collateral instead of the government securities and with a tenor of up to up to 3 months.