Uganda’s central bank raised its benchmark lending rate by 150bp to 14.5% at an extraordinary meeting held on July 13 in a bid to “avert any prospects of higher inflation”, triggered by the continued decline of the local shilling currency against the rising US dollar.
Since the beginning of this year, the Bank of Uganda (BoU) has raised the Central Bank Rate (CBR) by a total of 350bp, trying to curb inflationary pressures amid shilling depreciation. The shilling depreciated by 24% against the dollar during the fiscal 2014/15, which ended on June 30, but by 14.7% on trade weighted basis, the BoU said in its monetary policy statement. It believes that the depreciation has been driven more by the volatility in international markets and sentiments than by economic fundamentals. However, analysts cite investor worries about government spending before the general elections due in early 2016 as having contributed to the freefall of the shilling.
The BoU hopes that the latest rate hike will be sufficient to hold the annual core inflation rate in a range of 8%-10% in the current fiscal year.
Uganda's annual headline inflation rate steadied at a one-year high of 4.9% in June after accelerating in each of the previous four months. The annual core inflation rate, which excludes the more volatile prices of food crops, fuel, electricity and metered water, edged up to 4.9% in June from 4.8% in May.
The central bank noted also that the country’s GDP growth accelerated from 4.6% in 2013/14 to an estimated 5.0% in 2014/15, which, however, is below its projections. The economy is expected to “remain on a steady growth path”, driven chiefly by domestic demand.
Last week, the central bank of neighbouring Kenya also raised its key rate by 150bp, following the same 150bp hike a month earlier, also triggered by increased inflationary pressures due to a weakening of its shilling currency and rising fuel prices.
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