Central Bank defends interest rate hikes, blames projected inflation

Kampala. Bank of Uganda (BoU) has moved the Monetary Policy Committee (MPC) meeting to Tuesday next week. The bank has the discretion to move the meeting which determines an increment in lending rates to a date it deems fit. On top of the agenda of the meeting will be reacting to the sudden rise in inflation. BoU has defended the continued increment in Central Bank Rate (CBR) because it had projected inflation would rise above its target.
“So BoU acted before inflation rose significantly because the forecasts showed that future inflation was going to be above the 5 per cent target, six to 12 months in future,” BoU head of communications Christine Alupo told Daily Monitor in an interview.

Since April 2015, the Central Bank has been raising the benchmark lending rate over concerns on the effects of the rapidly depreciating Shilling.
Between April and August 2015, the lending rate has gone from 12 per cent to 16 per cent. This has prompted commercial banks to raise lending rates, with some reporting a high of 27 per cent. Additionally, the economic growth projection has also been revised downwards from 5.6 per cent to 5.2 per cent. This is the price the economy is paying in order to curb runaway prices of commodities.

“And because future inflation in 2016 threatened to breach the 5 percent target, BoU started tightening monetary policy to prevent the scenario of having inflation in the range of 7 to 9 percent in June 2015. Rather because BoU took action ahead of time, you can now expect that future inflation will be around the 5 percent target,” Ms Alupo added.
More troubling for BoU is the sudden surge in inflation to 7.2 per cent in September 2015, a factor to consider for another rate hike.
The current movement upwards in inflation has been considered to be going up the pace higher than anticipated by the Central Bank on account of unpredictable food prices, Uganda Shilling depreciation and anticipated policy changes in the US.

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