Tuesday, October 20, 2015

Uganda raises rate 100 bps in fifth hike to curb inflation

    Uganda's central bank raised its benchmark Central Bank Rate (CBR) by another 100 basis points to 17.0 percent, saying further tightening of monetary policy is warranted to "ensure that medium term inflation converges towards the BOU's policy target of 5 percent."
    The Bank of Uganda (BOU) has now raised its CBR rate by 600 basis points this year and also raised the rediscount rate to 21 percent and the bank rate to 22 percent. The central bank also raised rates in April, June, July and August.
    Past rate hikes have already dampened inflationary pressures and reduced the risk of high inflation, but the BOU said its outlook shows that inflation will continue to rise during the 2015/16 fiscal year, which began on July 1, as exchange rate depreciation over the last 12 months has yet to feed through completely to prices and will therefore continue to put upward pressure on inflation.
    In addition, projected weather conditions from El Nino could result in higher crop prices in the fourth quarter of this year and the first quarter of 2016, leading to heightened inflationary pressures.
    Uganda's inflation rate jumped to 7.2 percent in September from 4.8 percent in August, driven by "the rise in food crop prices, in combination with the effects of exchange rate depreciation and strong base effects on account of low inflation in September 2014," the BOU said.
    The BOU said there had been less volatility in the shilling's exchange rate in the last two months in comparison to "sustained depreciation pressures" since early 2014 and it expects the exchange rate "will remain relatively stable going forward, though sporadic exchange rate volatility cannot be ruled out due to the global economic conditions."
   Today's rate hike strengthened the shilling to 3,625 to the U.S. dollar from 3,670 shortly before the news. But compared with the beginning of the year, the shilling is down 24 percent.
    The BOU said it had revised downward its forecast for Uganda's economic growth in 2015/16 to 5.0 percent, but added this was still strong given the weak global growth.
    It added that the downward growth revision was due to four factors: subdued global growth, reduced capital inflows and low commodity prices, exchange rate depreciation that will raise the cost of imported capital and the impact of tight monetary and fiscal policies that may weaken domestic demand.
    The BOU had previously forecast growth this fiscal year of 5.8 percent but in late August the central bank's governor, Emmanuel Tumusiime-Mutebile said the growth forecast had been cut to 5.4 percent due to the dampening impact that rate rises would have on domestic demand.
    Uganda's Gross Domestic Product expanded by an annual 4.9 percent in the third calendar quarter of 2015, down from 7.1 percent in the second quarter.




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