Uganda Raises Key Rate by 3 Points to Curb Runaway Inflation

Uganda’s central bank raised its benchmark interest rate by 3 percentage points to curb inflation at an 18-year high and bolster the currency.

The Bank of Uganda increased the central bank rate to 23 percent from 20 percent, Governor Emmanuel Tumusiime-Mutebile told reporters today in the capital, Kampala. The bank has boosted the rate every month since it was introduced at 13 percent in July.

Rising food costs due to drought and higher oil prices boosted inflation in East Africa’s third-biggest economy to 30.5 percent in October, the highest level since January 1993, the Uganda Bureau of Statistics said yesterday. Uganda’s shilling has slumped 10 percent against the dollar this year, adding to import costs.

“Should the upside risks to inflation increase, monetary policy will need to be tightened further,” Tumusiime-Mutebile said. “We are trying to reduce aggregate demand.”

Inflation will probably peak in the coming months and slow next year, with the core inflation rate dropping below 10 percent by the end of 2012, the governor said.

The increase in the central bank rate last month helped to attract $50 million in foreign investment, spurring gains in the shilling, Jacob Opolot, director of research at the bank, told reporters in Kampala today.

Shilling Gains

The shilling was at 2,544.50 against the dollar as of 11:08 a.m. in Kampala from 2,545.50 before the governor began speaking. It was trading 1.6 percent stronger today.

“The Bank of Uganda, with firm government support, has indicated a commitment to continue the tightening phase of monetary policies as long as needed to break the back of inflationary expectations,” the International Monetary Fund said in a statement on Oct. 28. “The authorities clearly grasp the risk that inflation could become entrenched.”

While food was the trigger for inflation, price pressures are spreading. Underlying inflation, which excludes food crops, fuel, electricity and water costs, accelerated to 30.8 percent from 27.5 percent in September, the statistics office said.

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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