Bloomberg News

Uganda Lifts Benchmark Rate to 16%, Warns of More Increases

September 06, 2011

(Updates with economist’s comment in sixth paragraph.)

Sept. 6 (Bloomberg) -- Uganda’s central bank boosted its benchmark interest rate by 2 percentage points to rein in an 18 year-high inflation rate and curb a slump in the shilling.

The central bank rate was increased to 16 percent, Louis Kasekende, deputy governor of the Bank of Uganda, told reporters today in the capital, Kampala. The bank lifted the rate by 1 percentage point in August after setting it at 13 percent when it was introduced in July.

Inflation surged to 21.4 percent in August from 18.8 percent in the previous month as the worst regional drought in 60 years boosted food costs and a weaker shilling drove up import prices. The bank aims to bring the underlying inflation rate, which excludes food, energy and water, to 5 percent from 20 percent in August.

“If the inflation outlook deteriorates in the next few months, the Bank of Uganda will implement further increases in the central bank rate,” Kasekende said.

Inflation will probably ease toward the end of the year and in 2012, with core inflation expected to reach between 10 percent and 14 percent by September next year, Kasekende said.

“Recent inflation developments point to significant deterioration in the inflation backdrop,” Ridle Markus, an economist at Absa Group Ltd. in Johannesburg, said in a note to clients. “The bias for further monetary tightening remains.”

Shilling Support

Inflation will probably peak at 22 percent in the fourth quarter, Markus said.

Higher interest rates may help to support the shilling, which plunged 18 percent against the dollar this year, the worst performer of 176 currencies tracked by Bloomberg.

“It’s expected to support the shilling,” Kasekende said. “The rate on Treasury bills and bonds will also increase and there will be interest, not only by Ugandans, but also from investors abroad. That may lead to capital inflows.”

The shilling fell as much as 0.3 percent to 2,817 against the dollar today and was trading at 2,812 as of 5:41 p.m. in Kampala. Demand for Ugandan Treasury bills has slumped this year, with the yield on the 91-day security reaching 16.021 percent on Aug. 24 compared with 11.9 percent on May 26.

Uganda, East Africa’s third-biggest economy and the continent’s second-largest coffee producer, is scheduled to become an oil producer next year when Tullow Oil Plc begins pumping crude and gas from the Lake Albert Basin. The central bank expects the economy to expand 5 percent in the year through June 2012.

--Editors: Paul Richardson, Nasreen Seria, Karl Maier

To contact the reporter on this story: Fred Ojambo in Kampala at fojambo@bloomberg.net

To contact the editor responsible for this story: Paul Richardson at pmrichardson@bloomberg.net


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