##nctly by the former deputy governor of the south african reserve bank who wrote that : “... higher interest rates will not help to make the maize crop grow higher ”. the forward looking nature of monetary policy why does the bou frame its policy target for inflation in terms of the medium term? consumer prices, even when excluding volatile commodity prices, are subject to shocks from both the demand and supply side of the economy ; for example, movements in the nominal exchange rate have an impact on the domestic prices of imported goods. these shocks can operate over a much shorter horizon than that of the transmission mechanism of monetary policy. the transmission mechanism of monetary policy normally extends over a period of one to two years. what monetary policy can feasibly achieve is to control average inflation over a longer term time horizon, which is why we have defined our inflation target as a medium term target. the medium term time horizon over which the transmission mechanism of monetary policy operates mean that monetary policy decisions must be made on the basis of a forecast of future developments in the economy. current or past developments, such as the latest available inflation outturn, are only relevant to the monetary policy decision to the extent that they provide useful information about future developments, which may not be very relevant at all. this entails a qualitative shift in the way in which policy makers think about the economy and make decisions, to embrace a forward looking approach. inflation forecasts spanning the time horizon of the monetary policy transmission mechanism are the most important inputs for monetary policy decisions in an itl framework. inflation forecasts need to include both forecasts derived from quantitative models and qualitative judgements about how the factors which influence inflation, such as fiscal policy and the exchange rate, will evolve over the medium term. policymakers also need to think in terms of probabilities and risks ; for example, what is the probability that aggregate demand growth will accelerate over the forecast horizon? and given this probability, do we need to take action to forestall a rise in inflationary pressures? bis central bankers ’ speeches the role of the exchange rate policy towards the exchange rate is one of the most difficult and challenging aspects of implementing an itl monetary policy framework in a low income open economy. both the bou ’ s primary and secondary policy monetary policy objectives are domestic objectives : inflation and output stabilization respectively. the policy interest rate is only used to influence these two objectives. but that does not mean that policy makers can be indifferent to the level

emmanuel tumusiime - mutebile : uganda ’ s financial sector at 50 – achievements, challenges and expectations for the future remarks by mr emmanuel tumusiime - mutebile, governor of the bank of uganda, at the annual general meeting of the uganda institute of banking and financial services, kampala, 14 june 2013. * * * the board chairperson of the uganda institute of banking and financial services members of the board of directors of the institute, members of the institute present, ceos of financial institutions and all bankers present, invited guests in your respective capacities, ladies and gentlemen, it is a great pleasure for me to address this agm of the uganda institute of banking and financial services. i will begin by thanking the board and members of the institute for arranging the agm and for their choice of theme : “ uganda ’ s financial sector at 50 ; achievements, challenges and expectations for the future ” which is clearly very pertinent for everyone involved in the sector. in keeping with this theme, i want to share with you my thoughts on what i believe are the most pressing challenges facing the financial services industry in uganda today. these are challenges which must be confronted if the industry is to contribute fully to our efforts to transform the structure of the economy and move it towards middle income status. i would like to highlight three issues in particular ; the need to reduce interest rate spreads in the banking industry ; strengthening the financing of small and medium scale enterprises and the diversification of our financial sector. the regional financial sector assessment program, which was conducted in may of this year, showed that bank interest rate spreads in uganda are the highest in the east african region after burundi and among the highest in the world. the interest rate spread in uganda in 2012 was 15 percent, compared to less than 12 percent in both kenya and tanzania. spreads are high mainly because of heavy overheard costs and high profits earned by banks. overheads and profits before tax accounted for 42 percent and 28 percent of banks ’ gross income respectively in the 12 months ending in march of this year. unless we can reduce spreads, it will be very difficult to bring bank lending rates down to levels which are more affordable for borrowers. to reduce interest rate spreads it will be necessary for banks to cut overheads as a share of their income, by becoming more efficient. the banking industry is very profitable in uganda : the average return on assets earned over the last 12 months was 3. 6 percent. but banks should also recognize that