Uganda Raises Benchmark Rate to 16% to Halt Currency Slump

Uganda’s central bank raised its benchmark interest rate for a fourth consecutive time to halt the currency’s depreciation and curb inflation.

The Bank of Uganda increased the key lending rate by 150 basis points, or 1.5 percentage point, to 16 percent, Governor Emmanuel Tumusiime-Mutebile told reporters on Monday in the capital, Kampala. One of the three economists surveyed by Bloomberg forecast the rate would stay unchanged, while the rest predicted increases of 50 basis points to 100 basis points.

Central banks across Africa are tightening monetary policy to bolster their currencies as falling commodity prices and the prospect of higher U.S. interest rates prompt investors to sell off emerging-market assets. Uganda’s shilling has dropped 22 percent against the dollar this year, the worst in Africa.

The increase will help keep core inflation below 10 percent and allow it to slow toward the target of 5 percent in the medium term, Tumusiime-Mutebile said. Inflation quickened to a 14-month high of 5.4 percent in July.

“A tighter monetary policy stance is warranted to forestall risks of higher inflation,” Tumusiime-Mutebile said. Risks include “the future path of the exchange rate, which will in part be influenced by external developments, and the speed with which the recent depreciation feeds through to higher inflation.”

The Ugandan currency weakened 0.6 percent against the dollar to 3,545 shillings at 1:20 p.m. local time.

The “move is to protect the shilling,” said Stephen Kaboyo, managing director of Alpha Capital Partners. “There is no other tool rather than tightening at the moment.”

Central banks in sub-Saharan Africa are likely to face steeper challenges in restoring expectations of currency stability as risk appetite shifts away from emerging markets, said Razia Khan, Africa analyst at London-based Standard Chartered Plc.

“This does not mean that more tightening alone is required,” she said in e-mailed responses to questions. “It means more effective tightening, and possibly a combined monetary and fiscal policy effort to boost confidence in the local currency, will be required.”

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