Uganda holds rates at 11 percent, sees inflation risks

KAMPALA - Uganda's central bank held its benchmark lending rate at 11 percent on Tuesday, citing renewed inflationary pressure.

Policymakers said the bank expected annual core inflation would rise slightly over the next two-three months, before falling back towards its medium-term target of 5 percent. The rate was at 5.5 percent last month.

Central bank Governor Emmanuel Tumusiime-Mutebile also said the bank had raised its economic growth forecast for the 2013/14 fiscal year to 6 percent from an initial forecast of 5.1 percent.

"The adverse weather conditions currently being experienced in most parts of the country could push up prices in the near-term and this poses an upward risk to the inflation forecast," Tumusiime-Mutebile told a news conference.

The bank last month cut interest rates by 100 basis points, citing easing inflationary pressures, weaker-than-thought household consumption and a stronger-than-expected local currency.

Uganda raised interest rates in the second half of 2011 to combat runaway inflation. It steadily loosened monetary policy through 2012 before pausing at the beginning of this year as inflation fell back into single digits and the currency stabilised.

But the lower policy rate has not filtered through to the real economy where average lending rates stand at 24 percent, still higher than the 20 percent that banks used to lend at before the currency and inflation crises of 2011.

Banking executives attribute the higher borrowing costs to expensive deposits booked when the rates were at their peak in late 2011 and early 2012.

On the central bank's increased growth forecast for this year, Tumusiime-Mutebile said: "The pick-up in real economic growth is unlikely to constitute an upside risk to inflation in the near-term because output is still slightly below potential growth rate of about 7 percent."

Reuters