Food prices push inflation up in May

The annual headline inflation hit to 5.4% at the end of May 2016 from 5.1% a month earlier due to a rise in core inflation and food prices according to the Uganda Bureau of Statistics (UBOS).  Core inflation - which excludes food, fuel, electricity and metered water rose to 7% from 6.4% in April.

There were also price increases for footwear, clothes and other non-food items.

Despite the rise in core inflation, some analysts believe that the Bank of Uganda will not increase its benchmark Central Bank Rate but leave it at 16% to boost flagging demand in the economy. The Central Bank considers projections of core inflation for its monetary policy decisions.

The Central Bank has a set target of 5% core inflation and tends to increase its benchmark CBR rate whenever core inflation is projected to deviate further away from targets.

Stephen Kaboyo, the Uganda Telecom chairman and Alpha Capital CEO said: "...the uptick in inflation for May looks to be mainly food prices but my sense is that there could be an element of pass thru of currency weakness as well,

"The shilling has however stabilized more recently which reduces the risk from this angle going forward. Even with the slight edge up, inflation still remains within range,

"Policy makers will draw a lot of comfort from this and therefore hold the view that the Central Bank is likely to keep the policy rate unchanged at the upcoming policy meeting.  The neutral policy stance would work to anchor inflation and support the shilling."

The shilling was trading at 3,359.52/3,369.52 buying and selling respectively at noon on Tuesday moments after the inflation data was released. This was slightly stronger than 3,360.52/3,370.52 at the close of business on Monday.

Bank of Uganda's monetary policy committee is set to meet on June 14 to set the Central Bank Rate (CBR) for the next two months. In April the central bank, cut the CBR to 16% from 17% to signal lower commercial bank lending rates as a means of boosting economic activity.