Kampala. The anticipated rise in inflation and lingering depreciation of the Shilling have seen Bank of Uganda raise the Central Bank Rate (CBR) to 17 per cent from 16 per cent, a development it says will bring stability in the entire economy.
Though the situation may lead to high lending rates and cost of doing business, BoU says it is better to have a tight monetary policy than high inflation because its impact is severe.
Addressing a news conference yesterday to announce the policy rate for October, BoU governor Emmanuel Tumusiime Mutebile said the monetary policy actions taken since April, which have entailed a rise in the CBR by 5 percentage points, have already dampened inflationary pressure and reduced the risks of high inflation.
“Nevertheless, to ensure that the medium term inflation converges towards the BoU’s policy target of 5 per cent, a further monetary policy tightening is warranted,” he said.
Uganda’s headline inflation rate is currently at 7.2 per cent while the core inflation rate which the Central Bank uses to control inflation at 5 per cent now stands at 6.7 per cent.
Effect of El Nino
In the next six months, the Central Bank projects that inflation will rise in the range of 8 to 10 per cent.
This is mainly because of the projected El Nino weather conditions which could result in higher food crop prices in quarter four of 2015 to quarter one 2016 thus leading to heightened inflationary pressure. Mr Mutebile said the forecasts are based on the prevailing domestic and external economic conditions and outlook that inflation will continue to rise over the course of the financial year 2015/16.
“External sources of inflation are likely to stay generally benign, given weak global conditions. On the domestic front, the exchange rate depreciation experienced over the last 12 months is yet to feed through completely to prices and will therefore continue to put upward pressure on inflation,” he said.
Since the second half of 2014, the Shilling has been under intense pressure depreciating by 40 per cent against the US dollar from August 2014 to August 2015.
From June to September 2015, the Shilling registered depreciation of 12 per cent.
In the first two weeks of October, the exchange rate has averaged Shs3686.65 per US dollar. By yesterday the Shilling traded at 3,666.7 buying and selling at Shs3,676.7 per US dollar.