Uganda's central bank raised its central bank rate (CBR) by 100 basis points to 12.0 percent, saying a "modest tightening of monetary policy should act to discourage economic agents from raising non food prices in response to the food price shocks and should counter any rise in inflation expectations."
The Bank of Uganda (BOU), which cut its rate by 100 basis points in June, quoted its governor, Emmanuel Tumusiime-Mutebile, as saying he expects the core inflation rate to remain above 6 percent for the next few months, but by tightening policy now, "I am confident that it will fall back towards our policy target of 5 percent by the third quarter of 2014."
Uganda is facing a supply side shock to agriculture that has raised food prices and may impede economic growth in 2013/14, the central bank said, with the risks to the outlook for core inflation over the next 12 months clearly rising.
Headline inflation rose to 7.3 percent in August from 5.1 percent in July, driven by a 16 percent rise in food crop prices due to drought. Core inflation, however, remained relatively stable at 6.6 percent but the central bank said core inflation is likely to be pushed up because higher food prices affect items within the core inflation basket, such as maize and flour, and higher food prices also feed through to the general price level via cost-push effects and inflation expectations.
Despite the worsening outlook for inflation, the central bank said it does not expect a repeat of the inflationary surge in 2011 because rapid bank credit growth and a large exchange rate depreciation do not pose the same effects in the current situation.
"Nevertheless, it is prudent to ensure that any second round effects from the food supply shock on non food prices are contained, thereby limiting the upward pressure on core inflation, through a timely adjustment of monetary policy," the bank said.
The governor said he was fully aware of the potential impact of the rat rise on economic activity, however "it is my strong view that this is a necessary to anchor inflation expectations and to support economic growth over the medium to long term."
The central bank's band around the central bank rate will remain at plus/minus two percentage points and the margin on the rediscount rate will be three percentage points. The rediscount rate will be 15 percent and the bank rate 16 percent.