Ugandan Central Bank Lowers Key Rate to 14% to Boost Economy

  • Benchmark rate cut by cumulative 300 basis points this year
  • Bank sees inflation stabilizing at policy target of 5 percent

Uganda’s central bank reduced its benchmark interest rate by 100 basis points for a third consecutive time, to 14 percent, citing an unfavorable growth outlook due to global economic uncertainty.

While warning that drought may hurt food prices, a major component on the inflation index, the monetary policy committee expects both headline and core inflation to slow toward 5 percent by the end of 2016, Governor Emmanuel Tumusiime-Mutebile said.

“Given that inflation is forecast to stabilize around the policy target of 5 percent over the next six months, the Bank of Uganda believes that a continued easing of monetary policy is warranted,” he told reporters in the capital, Kampala.

The reduction will support economic growth through a recovery of private sector credit, he said. The nation’s economy will expand by a projected 5.5 percent in the financial year through June 2017, compared with an estimate of 4.6 percent in 2015-16.

Economic growth in Africa’s biggest coffee exporter slowed to 3.5 percent in the first three months of the year as agriculture and industrial output growth decelerated. Its inflation rate rose by 5.1 percent in July, slower than the 5.9 percent registered in June, according to the Uganda Bureau of Statistics.

“While continued foreign exchange stability will be key to the Ugandan rate outlook, this stance -- clearly influencing expectations -- is nonetheless somewhat unusual for the BoU,” Standard Chartered’s head of Africa macro research, Razia Khan, said in a note.

The Uganda shilling is unchanged against the dollar this year, after depreciating 18 percent in 2015.

The central bank’s shift to monetary easing earlier this year may mean more cuts are on the horizon for 2017, BMI Research, a unit of Fitch Ratings, said in an e-mailed note before the announcement, forecasting 300 basis points worth of cuts next year.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE