Uganda raises key rate again to fight inflation
Nov 01, 2011
Uganda's central bank raised its benchmark lending rate for the fourth time in as many months on Tuesday to dampen inflationary pressures and curb credit growth, in line with a tightening stance applauded by donors.
Uganda's central bank raised its benchmark lending rate for the fourth time in as many months on Tuesday to dampen inflationary pressures and curb credit growth, in line with a tightening stance applauded by donors.
The Bank of Uganda raised its key rate by 300 basis points to 23 percent. It said it expected inflation to peak in the coming months, before declining in 2012, with core inflation reaching single-digits by the end of next year.
The shilling initially firmed on the announcement but later eased off its intra-day traded high of 2540.55.
Uganda's inflation rate leapt to 30.5 percent in October, its highest since 1993, although the month-on-month rate decelerated significantly, an indication the bank's cycle of tightening was working, analysts said.
Central bank Governor Emmanuel Tumusiime-Mutebile signalled, however, that the regulator was ready to raise rates again if inflationary pressures persisted.
"The Bank of Uganda is making clear that its priority is to prevent high inflation from becoming entrenched and it seems to be specifically targeting credit growth, which has expanded rapidly, with this in mind," said Mark Bohlund, an economist at IHS Global Insight.
The International Monetary Fund (IMF) and the African Development Bank (AfDB) have both praised BoU's aggressive monetary policy tightening stance. AfDB trimmed its economic growth outlook for Uganda in 2011 to 6.1 percent in part due to the rampant inflation rate.
BoU has raised the benchmark lending rate every month since the rate was launched in July at 13 percent.
"The increase of the CBR in October has already had positive results in that it has helped attract foreign capital inflows, which contributed to the strengthening of the exchange rate against the U.S. dollar in the second half of October," Tumusiime-Mutebile said.
The Ugandan shilling, which is down more than 9 percent against the dollar so far this year, has gained 11 percent since the central bank surprised the markets with a four-point rate hike on Oct. 4.
"This exchange rate appreciation will help damp inflationary pressures, especially for imported goods," the governor said.
At 1125 GMT, the shilling traded at 2,570/2,570, roughly the same as Monday's close of 2,570/2,590.
Razia Khan, head of Africa research and Standard Chartered bank in London said the bank was proving its inflation-busting credentials and commitment to price stability.
"This credibility that has stood the authorities in good stead, and reignited offshore interest in Ugandan assets, allowing the shilling to strengthen," Khan said.
The central bank said that in the year to September commercial bank lending to the private sector grew by nearly 47 percent.
Ahmed Kalule, a trader at Bank of Africa in Kampala forecast the shilling would hover around 2,500 for the rest of the year.
Reuters