BOU warns of possible food price increase

By Faridah Kulabako

THE shilling may depreciate further and food prices increase more than expected if farmers post poor agricultural harvests, Bank of Uganda (BOU) has warned. 

The BOU Governor, Emmanuel Tumusiime Mutebile said there are upside risks to inflation over the medium term due to the likely increase in domestic demand.

Mutebile was speaking during a media briefing to issue the December Monetary Policy Statement at BOU.

He explained that core inflation, which excludes food crops and metered water which are volatile to price changes is expected to be between 2–4% over the next three months. 

Core inflation is also expected to rise to about 5% over the next 12 months. This would most likely increase prices for imported goods.

Although the shilling has depreciated by about 9% against the dollar since January, the director of research at BOU, Adam Mugume, said further depreciation has been contained by low prices of imported goods.

Last week, the shilling was quoted at 2765/75, buying and selling respectively, from 2760/70 early in the week.

Despite the depreciation pressures, the Central Bank, which would have intervened by selling more dollars to strengthen the shilling, has instead been the greenback, an action that has increased depreciation pressures on the shilling.

Mutebile, however, declined to give the reason for the action.

The depreciation and increase in food prices also pose inflation risks, since food accounts for the biggest percentage of goods and services. 

But despite an increase in the November annual headline inflation to 2.1% from 1.8%, and the upside risk to inflation in the market, BoU maintained the Central Bank lending rate at 11%.

Standard Chartered Africa Region head of research, Razia Khan, said although headline inflation is currently below 5%, it is expected to rise over the coming year. 

She added that the expected spending in the run up to the 2016 general elections would require BOU to tighten the Central Bank rate.

Mutebile, however, said the expected increase in election year spending would not spark off inflation as was the case in 2011. 

He added that the situation in 2011 was worsened by the bad weather, which resulted in food price increases. 

Maintaining a Central Bank rate at 11% has seen private sector credit grow by 12.6% in the first five months of 2014/15, compared to 8.5% the previous year.