Central Bank maintains lending rate at 21%

By Samuel Sanya

Bank of Uganda has kept the Central Bank benchmark lending rate at 21% for a second month running despite a decline in annual headline inflation.

Emmanuel Mutebile, the governor Bank of Uganda pointed out at a press briefing on the economy that although inflation is on a downward path, there is eminent pressure from developments in the price of oil, food crops and the exchange rate.

“The fall in inflation in the month of March was much less than expected. The earlier reduction in Central Bank Rate (CBR) could have caused some offshore participants in the treasury bonds and bills to think twice and pullout,” he said.

“The Bank of Uganda still aims to reduce annual inflation to single digits by the end of this calendar year and to around 5% by mid-2013,” he added.

The governor noted that the latest macroeconomic indicators, particularly a deceleration in Gross Domestic Product (GDP) in the first half of the current financial year pointed to an uncertain outlook.

The exchange rate lost 6.8% in value against the dollar in March with the amount of new loans stagnating, although total money in supply has begun to pick up.

The shilling edged higher after the decision, at 9am, it was quoted at 2,505/15, up from 2,515/25 ahead of the Monetary Policy Committee announcement.

Mutebile said the central bank would start cutting interest rates again once it saw the risks to inflation ease.

Some analysts had expected a cut this time round after inflation dropped to 21.2 percent in March from 25.7 percent in February and gross domestic product data showed the economy contracting in the fourth quarter of 2011.

The Bank of Uganda won praise for ramping up its Central Bank Rate quickly as inflation accelerated in 2011, taking the key lending rate to 23 percent.

As inflation started to slow from a 2011 peak of over 30 percent in October, the central bank also began trimming its key rate, lopping one percentage point off in both February and March to leave it at 21 percent.

However, the currency slumped as much as 8 percent after the March cut as some analysts thought it was slightly premature to carry on easing with inflation still above 25 percent.

There was also some speculation the governor might be forced to step aside due to graft allegations. He survived a parliamentary motion to remove him last month.

“A surprising decision by the Bank of Uganda to hold the CBR at 21%, contrary to our expectation of at least a modest easing of 50 basis points,” said Razia Khan, head of Africa research at Standard Charted Bank.

“This time, notwithstanding the improvement in March, we have a clear statement that the risks to inflation have risen and that non-food inflation remains a concern.”

“Going forward, some political pressure will be brought to bear on the BoU, but we would anticipate further improvement in inflation, which we still expect to see in single digits by the end of the year,” she added.  

"The recent volatility ... around the Uganda shilling has clearly persuaded the central banker to stay his hand," said Aly Khan Satchu, a Nairobi-based independent analyst.

"The central banker in Uganda has been like the old Bundesbank and consistently ahead of the curve. I believe he is seeking to once again show his inflation busting credentials and, in the context of things, I think that is no bad thing," he said.

Razia Khan, head of Africa research at Standard Charted Bank in London, said the central bank was likely to come under political pressure to ease rates, but given the governor's statement, there may not be quick cuts.

"The performance of the Ugandan shilling on the forex market now looks likely to be an additional and important factor influencing the pace of easing that we expect to see this year," she said.

"With oil prices as high as they are, the BoU will not risk macroeconomic stability for the sake of rapid easing."