KAMPALA- Uganda's central bank unexpectedly raised its benchmark lending rate by 100 basis points to 12 percent on Tuesday, citing above-target core inflation.
"Although annual core inflation will probably remain above 6 percent for the next few months, by tightening monetary policy now, I am confident that it will fall back towards our policy target of 5 percent by the third quarter of 2014," Bank of Uganda Governor Emmanuel Tumusiime-Mutebile said.
The governor told a news conference that the bank did not expect the inflation rate to shoot to levels which occurred in 2011 as factors like rapid credit growth did not pose the same threats at present.
Uganda's inflation rate in the year to August rose to 7.3 percent, from 5.1 percent in July.
The statistics office said that the rise in inflation was due to decreased food supplies in the market due to a long dry spell.
The shilling did not immediately react to the rate rise, and was trading at 2,583/2,593 to the dollar at 0945 GMT to the dollar.
Tumusiime-Mutebile said the central bank's move was intended to keep in check any second round effects on non-food prices resulting from a food supply shock.
"I am fully aware of the potential impact of this on real sector activity. However, it is my strong view that this is a necessary action to anchor inflation expectations and to support economic growth over the medium to long term," he said.
Tumusiime-Mutebile said that banks should not use the rate hike as a reason to widen interest rate spreads.
Uganda had held its benchmark rate at 11 percent for the previous two months, having cut from 12 percent in June, the first time it had cut its rate in six months.