Uganda’s central bank holds key rate at 17 percent

By Halima Athumani

KAMPALA, Uganda

Uganda’s Central bank has on Wednesday announced that it would hold its benchmark lending rate at 17 percent.

At a press conference, central bank governor Emmanuel Tumusiime-Mutebile announced that, “Given our macroeconomic forecasts, the Bank of Uganda will hold the key rate rate at 17 percent. This is consistent with stabilizing core inflation and returning it to the target of 5 percent over the medium term.”

In his monetary policy statement on Wednesday, governor Mutebile stated that the annual inflation rate continued to rise, with headline inflation increasing to an annual rate of 9.1 percent in November from 8.8 percent in October. “The increase in inflation is attributable to higher food crop prices, the increase in electricity tariffs, and the effects of exchange rate depreciation," the governor said.

However core inflation, which strips out food and energy prices, increased to an annual rate of 6.7 percent from 6.3 percent.

Economist Fred Muhumuza told Anadolu Agency that food inflation, which currently stands at 20.3 percent for November, is the largest driver of rising prices. “The central bank won’t address it because it’s seasonal; in any case the bank's high interest rates makes it more difficult to invest in agriculture due to the high cost of borrowing money from the banks.”

"The Central bank is trying to stop the public from borrowing and is revising their expectations of using dollars and purchasing imports which reduces the pressure on the dollar.”

The monetary policy statement also indicates that core inflation has nonetheless stabilized in the last three months after accelerating earlier in the year.

Mutebile also forecast that annual core inflation will peak at around 10 percent in the third quarter of 2016, and then gradually decline towards the 5 percent target over the medium term.

Muhumuza pointed out that the high interest rates slow economic growth. “The moment you raise interest rates, investors will not borrow and won’t invest, and so growth slows, but that also means less job creation, and it undermines all the other objectives of government.”

Services inflation has declined slightly. “This indicates that the tightening of monetary policy since April 2015 has begun to curb inflationary pressures,” the statement said.

According to the governor, the projection for real economic growth for the 2015/16 financial year remains at 5 percent. However, there are downside risks which threaten projected growth, particularly stemming from the external economic environment, Mutebile warned.

The major risk factors may include: slower growth in major emerging market economies; further decline in global commodity prices; as well as reduced access to external finance for developing countries due to heightened perceptions of risk, as well as possible monetary policy tightening in the U.S.

“Consequently, our balance of payments in the short- to medium-term will remain vulnerable to external shocks."