Bloomberg News

Uganda to Keep Raising Rates Until Inflation Starts to Slow

October 24, 2011

(Updates with central banker’s comments starting in fifth paragraph.)

Oct. 24 (Bloomberg) -- Uganda’s central bank will continue raising interest rates until “inflation is clearly on a downward trajectory,” said Adam Mugume, the bank’s executive director of research.

The Bank of Uganda “will not allow inflation to keep rising,” Mugume said in a statement published in the Kampal- based New Vision newspaper today. Inflation may ease after peaking this year as food prices moderate, he said.

Uganda’s central bank boosted its benchmark interest rate by four percentage points to 20 percent on Oct. 4, as it sought to halt the shilling’s slide and combat inflation that is the highest in almost two decades. The bank said last week it plans “appropriate steps” to support the currency, without disclosing them.

Inflation accelerated to 28.3 percent last month. The shilling has fallen 18 percent this year and reached a record low last month.

The risks for the economy are “tilted to the downside” because of uncertainty, and the bank “will endeavor to delicately balance the need to guard against extreme risks to growth but also limit the adverse impact of prolonged inflation,” Mugume said.

‘Supply-Side Shocks’

The bank introduced its benchmark rate in July, when it was set at 13 percent, in order to tackle inflation arising from “supply-side shocks,” Mugume said. It mopped up 130 billion shillings ($47 million) of liquidity within two months, bringing the total to “negative figures,” he said. Interbank lending rates, which averaged between 4 percent and 5 percent the previous two years, jumped to 20 percent in the third quarter of this year.

The bank is intervening in the market using reverse repurchase agreements “to avoid excessive liquidity stress,” Mugume said. In such transactions, the central bank buys back securities from lenders to inject money into the financial system.

--Editors: Ben Holland, Ana Monteiro.

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

To contact the editor responsible for this story: Nasreen Seria at nseria@bloomberg.net


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