Financial Markets
Rediscount and Bank Rates
The Central Bank under the BOU Act 2000, is mandated to issue securities on behalf of Government to the public. The public may rediscount their securities at BoU at an interest rate known as the Rediscount Rate. In the same Act, Bank of Uganda (BOU) is required to extend loans to commercial banks for a period not longer than three months at an interest rate at least one percentage point higher than the Rediscount Rate. This interest rate is known as the Bank Rate. The short term borrowing is collateralized by government securities, that is, Treasury bills and bonds. The BoU fully adheres to the law that requires the central bank to fix and make public at all times its standard Rediscount Rate.
Effective July 2011, the derivation of the Rediscount and Bank Rate is pegged to the monetary policy’s signaling rate- the Central Bank Rate (CBR). The Rediscount Rate and Bank rate are determined as a margin on the CBR, with the margin and CBR being set by the BoU’s Monetary Policy Committee (MPC). For example, the Rediscount rate was 4 percentage points on the CBR and the Bank rate was 5 percentage points on the CBR in October 2012.
Before the implementation of Inflation targeting-Lite policy framework in 2011, the Rediscount Rate was pegged to the 91-day Treasury bill annualized yield. It was derived from the average of the three recent 91-day Treasury bill annualized yields to reflect market conditions plus a margin to reflect the monetary policy stance at a time. The Rediscount Rate, therefore, changed as and when 91-day treasury bills had been issued and sold, and/or when there was a change to the margin.
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