Uganda's central bank raised its benchmark Central Bank Rate by a further 100 basis points to 13.00 percent to curb "high inflationary presssures" from the depreciation of the shilling and improving demand and said it "will tighten monetary policy further should there be deterioration in the inflation outlook."
The Bank of Uganda (BOU), which also raised its rate by 100 basis points in April, forecast that annual core inflation would rise to 8-10 percent by the end of the 2015/16 financial year, which ends June 30, an increase of 1 percentage points from the April forecast.
"Much of the increase in core inflation is attributed to currency depreciation and inflation expectations," the BOU said, adding the pass-through of the lower exchange rate and strengthening economic activity domestically and internationally will put further upward pressure on consumer prices in the absence of further tightening.
The rate hike should help ensure that inflation converges towards the central bank's policy target of 5 percent during 2016/17. The BOU also raised the rediscount rate and the bank rate by 100 basis points to 16 and 17 percent, respectively.
Uganda's headline inflation rate rose to 4.9 percent in May from 3.6 percent in April, with core inflation rising to 4.8 percent from 4.6 percent, driven by the impact of exchange rate depreciation.
Uganda's shilling has been depreciating since early 2014, reflecting the general rise in the U.S. dollar and a weak balance of payments position. Although the shilling stabilized in April and May, its depreciation picked up speed this month. Today the shilling was quoted at 3,184.8 to the U.S. dollar, down 13.2 percent since the beginning of the year.
Recent economic data point to strong growth in 2014/15 fourth quarter Gross Domestic Product, with the BOU projecting 5.3 percent growth for the full 2014/15 year and 5.8 percent for 2015/16, driven by higher public investment and a rebound in private sector demand.
Uganda's current account deficit is projected to widen to 10.3 percent of GDP in 2015/16 from 8.4 percent in 2014/15 due to higher non-oil private sector imports and public infrastructure, lower personal transfers and weak exports due to subdued commodity prices and lower demand.