Uganda Holds Key Lending Rate as Inflation Uptick Seen Temporary

Uganda’s central bank left the benchmark interest rate unchanged, after raising it last month, saying inflationary pressures stemming from rising food prices are temporary and may start abating by next year.

The Bank of Uganda kept the key lending rate at 12 percent, central bank Governor Emmanuel Tumusiime-Mutebile told reporters today in Kampala, the capital. Two of four economists in a Bloomberg News survey predicted the decision, while the others forecast a 50 basis-point to 1 percentage-point increase.

“Inflation has continued to edge up, largely driven by a temporary rise of food-crop prices,” according to a monetary policy report e-mailed today by the central bank. “In the second half of 2013-14, food price inflation is expected to decline somewhat owing to downward base effects and the decline in international food commodity prices.” Uganda’s financial year runs July through June.

The central bank in August increased its policy rate for the first time in almost two years by 1 percentage point as inflation quickened. Inflation in Africa’s biggest coffee exporter accelerated to 8 percent in September, the highest in 13 months, from 7.3 percent in August after drought cut crop supplies, pushing up food prices that have a 27 percent weighting in the consumer-price index. Core inflation quickened to 6.9 percent from 6.6 percent, moving further away from the 5 percent medium-term target set by the central bank.

Lending Rates

Commercial bank lending rates remain “elevated,” according to the statement. Lending rates stood at an average 23 percent in August, little changed from July, according to central bank data. Two years ago, complaints about the high cost of living and expensive loan charges amid record interest rates prompted protests led by the political opposition.

“The central bank is trying to ensure commercial banks lower their prime lending rates,” Dan Edoma, an economist at African Alliance Uganda Ltd., a Kampala-based investment bank, said by phone. “It is, in general, looking at bringing down the cost of financing.”

The government forecasts economic growth in Uganda may expand by more than 6 percent in the year through June from 5.8 percent in 2012-13 because of increased infrastructure investment and the expansion of agriculture and services.

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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