Uganda's central bank raised its benchmark Central Bank Rate (CBR) by a further 150 basis points to 14.50 percent "to avert any prospects of higher inflation" from the recent depreciation of the shilling's exchange rate, a move that it expects will be sufficient to hold annual core inflation in the range of 8 to 10 percent.
The Bank of Uganda (BOU), which has now raised its rate by 350 basis points this year after rate hikes in April and June, said the band around its CBR would be kept at plus/minus 2 percentage points and the margin on the rediscount rate at 3 percentage points, resulting in an increase in the rediscount rate to 17.5 percent and the bank rate to 18.5 percent.
"The BOU recognizes that there are heightened risks to inflation, economic growth and financial conditions. The BOU will continue to assess these risks to the outlook and take appropriate actions," the central bank said.
Today's rate hike was largely expected as the central bank had called a special meeting by its Monetary Policy Committee in response to a continued decline in the shilling against the rising U.S. dollar following the previous meeting on June 16. Last month the BOU said it would tighten monetary policy further if the inflationary outlook worsened.
In the 2014/15 financial year, which ended June 30, the shilling fell 24 percent against the dollar and by 14.7 percent on a trade weighted basis.
The shilling has been depreciating since February 2014 but the fall has been accelerating since May - despite central bank support in markets - with the shilling trading at 3,455 to the dollar today, down 20 percent this calendar year.
The BOU, which still allows the exchange rate to be set by markets, said the volatility of the exchange rate was driven more by sentiment than economic fundamentals but the pass through of the depreciation to inflation was yet to be evident.
Uganda's headline inflation rate was steady at 4.9 percent in June - due to a fall in monthly food crop inflation - while core inflation rose slightly to 4.9 percent from 4.8 percent.
The BOU targets inflation of 5 percent and said in June that its rate hikes should help inflation fall towards its target during the 2016/17 financial year. It did not repeat that forecast today.
Latest growth data shows that Uganda's economy is continuing to expand, but at a more moderate pace, with the central bank estimating growth in the 2014/15 year of 5.0 percent, up from 4.6 percent in 2013/14, as domestic demand supports growth despite weaker exports.
In the first quarter of 2015, Gross Domestic Product expanded by 0.28 percent from the previous quarter for annual growth of 4.9 percent, down from 7.1 percent in the fourth quarter of 2014.
"Although, economic growth outturn for 2014/15 was less than what had been projected, the prospects for the Ugandan economy to remain on a steady growth path, with domestic demand being the key driver of economic growth," the central bank said.