Uganda hikes benchmark rate by another 150bp

By bne IntelliNews August 10, 2015

Uganda’s central bank raised on August 10 its benchmark lending rate by 150bp to 16% in yet another effort to keep inflation in check amid a continuing weakening of the local shilling currency.

The Bank of Uganda (BOU) has raised the Central Bank Rate (CBR) by a total of 500bp since April, trying to limit the depreciation of the shilling and curb inflationary pressures.

“The BOU believes that a tighter monetary policy stance is warranted to forestall risks of higher inflation, to ensure that annual core inflation remains in single digits and converges towards the BOU’s policy target of 5 per cent in the medium term,” the bank said in a statement.

Uganda's annual headline inflation rate quickened to a 15-month high of 5.4% in July after staying at 4.9% in the preceding two months. The annual core inflation rate, which excludes the more volatile prices of food crops, fuel, electricity and metered water, accelerated also to 5.4% in July from 4.9% in June, still comfortably within the central bank’s target range of 2pp above or below 5%.

However, the BOU expects the core inflation to accelerate to a range of 8%-10% in the current fiscal year, depending on the future path of the exchange rate and the speed with which the recent depreciation feeds through to higher inflation.

Last month, the BOU said it believes that the depreciation had been driven more by the volatility in international markets and sentiments than by economic fundamentals. However, analysts cite investor worries about increased government spending before the general elections due in early 2016 as having contributed to the freefall of the shilling.

Last week, the central bank of neighbouring Kenya, which also fights with heightened inflationary pressures due to a sharp depreciation of its shilling currency and rising fuel prices, maintained the benchmark interest rate at 11.5% after hiking it by a total of 300bp in June and July. Many analysts had expected the bank to lift rates further in a bid to support the shilling in view of the global strength of the US dollar, but it preferred to wait for the previous tightening measures to be fully transmitted to the economy.

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