Bloomberg News

Uganda’s Central Bank Boosts Benchmark Interest Rate to 20%

October 04, 2011

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

Oct. 4 (Bloomberg) -- Uganda’s central bank boosted its benchmark interest rate by 4 percentage points to curb inflation at an 18-year high and bolster the shilling.

The central bank rate was increased to 20 percent, Bank of Uganda Governor Emmanuel Tumusiime-Mutebile told reporters today in the capital, Kampala. Before today, the rate was raised by 3 percentage points since it was introduced in July.

Inflation soared to 28.3 percent last month from 21.4 percent in August 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 27.5 percent currently.

“With upside risks to inflation still significant, we believe the policy tightening bias remains,” Ridle Markus, an economist at Absa Group Ltd. in Johannesburg, said in note to clients today. “The aggressive tightening by the Bank of Uganda thus far bodes well for the shilling’s medium-term performance.”

The shilling plunged 19 percent against the dollar this year to an 18-year low and is the third-worst performer of all currencies tracked by Bloomberg. The shilling gained as much as 0.9 percent to 2,885.50 per dollar today and was trading at 2,859 as of 3:30 p.m. in Kampala.

Inflation to Slow

The central bank expects inflation to peak by the end of the year and begin slowing in 2012 as better weather conditions help to ease food prices, Tumusiime-Mutebile said.

“This should be seen as a clear signal to bring inflation under control,” he said. “However, should the upside risk to inflation continue in the months ahead, then monetary policy will be tightened further.

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.

Higher interest rates may crimp domestic spending, reducing the central bank’s economic growth projection to 5 percent in the year through June 2012 from 6 percent previously, the governor said.

‘‘Banks will certainly get a pinch as borrowing is discouraged and some borrowers may begin defaulting,” Kenneth Kitariko, the chief executive of African Alliance Uganda Ltd., an investment bank, said by phone from Kampala today. “Decreased borrowing will lead to decreased economic growth.”

--Editors: Paul Richardson, Nasreen Seria, Vernon Wessels

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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