Shilling closes weak but traders expect it to bounce back this week

The shilling traded in a narrow range against the dollar on Friday amid tepid demand but traders forecast it would strengthen next week on expectations the central bank will raise interest rates.

The shilling has shed 21.5% against the dollar this year, making it the world’s third-worst performing currency as it was hit by strong domestic demand for the dollar and speculative trading.

Commercial banks in Kampala quoted the local currency at 2,840/2,850, little changed from Thursday’s close of2,845/2,855.    
Analysts expect the Bank of Uganda (BOU) to raise its benchmark interest rate (CBR) for October by more than 200 basis points as it escalates efforts to curb inflation which jumped to 28.3% in September from 21.4% in August, the highest level since January 1993.
   
“If the CBR is raised as we expect, ordinarily we anticipate it would signal a spike in rates on BOU securities,  which should consequently support the shilling,” said Dickson Musoni, manager of treasury sales at KCB Uganda. “But the boost for the shilling will unfold over days and weeks. It won’t be a sudden jump because the market will take time to adjust.”