Uganda Holds Key Rate After Upward Shift in Inflation Risks

Uganda’s central bank left its benchmark interest rate unchanged, after reducing it by 12 percentage points since last year, warning of upward risks to inflation as a drought weighs on food prices.

The monetary policy committee kept the key rate unchanged at 11 percent, Governor Emmanuel Tumusiime-Mutebile told reporters today in the capital, Kampala. The forecasts of four analysts surveyed by Bloomberg were evenly split between an unchanged rate and a 100 basis-point cut.

“The adverse weather conditions currently being experienced in most parts of the country could push up prices in the near term and this poses an upward risk to the inflation forecast,” Tumusiime-Mutebile said.

The rate of core inflation, which strips out food crops, fuel, electricity and water, will probably rise for the next two months to three months and fall back to the 5 percent medium-term target by June 2014, Tumusiime-Mutebile said. Increased state spending in the budget year that began yesterday will have a “one-off impact on prices although the overall impact on the consumer price index will be small,” he said.

Underlying inflation eased to 5.5 percent in June from 5.6 percent in May, while headline inflation slowed to 3.4 percent, matching the almost 2 1/2-year low reached in April, as the cost of food and fuels declined.

Currency Support

The central bank reduced its key lending rate in June for the first time this year by 1 percentage point, after cutting it by 11 percentage points last year to support the shilling. The currency traded unchanged at 2,585 per dollar by 12:36 p.m. in Kampala, the highest since June 12.

Keeping the rate on hold, at a record low, is a policy signal for stronger credit growth, Tumusiime-Mutebile.

Bank lending rates have fallen more slowly than the central bank rate, leaving the nation with one of the widest interest-rate spreads in the region after Burundi, according to Tumusiime-Mutebile.

The average commercial bank lending rate in April was 24.6 percent, compared with a deposit rate of 2.77 percent. The yield on 91-Treasury Treasury bills stood at 9.8 percent as of June 12, according to the bank’s website.

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