Bank of Uganda targets inflation in policy shift

Friday June 24, 2011

Uganda will shift its monetary policy to target inflation rather than money supply growth and will launch a Central Bank interest rate in July, Dr. Louis Kasekende, the deputy governor, said yesterday.

The Central Bank has traditionally watched the amount of money in circulation in line with the level of economic activity instead of price stability.

“We will be using a price-based framework through a Central Bank rate based on the short-term interbank interest rates as opposed to the use of a quantity-based framework,” he explained during a seminar for business editors and reporters.

Adam Mugume, the Central Bank director for research, said the economy and the financial system had evolved in the past several years, making the targeting of money supply an ineffective economic tool.

Mugume said the bank will announce its rate and inflationary targets monthly, starting July 4.

“The current monetary framework does not address other things like growth and interest rates,” he said.

Mugume said the Central Bank rate will act as the market signal for an increase or decrease in money supply and the cost of borrowing.

Uganda’s year-on-year inflation rate rose for a seventh straight month to 16% in May, up from 14.1% in April, its highest level since May 1994.

The Central Bank did not say whether the soaring inflationary pressures, which stoked violent protests in April and May, influenced the monetary policy change.

The shilling slid to an all-time low of 2,508 to the dollar on Tuesday, but has since reversed its losses after the Central Bank intervened by selling $40m into the market.

Uganda will shift its monetary policy to target inflation rather than money supply growth and will launch a central bank interest rate in July, a top bank official said on Thursday.

The central Bank of Uganda (BOU) has traditionally watched the amount of money in circulation in line with the level of economic activity instead of price stability.

“We are moving from quantity to price using short-term interest rates.

“We will start targeting inflation by using the Central Bank Rate (CBR),” Louis Kasekende, the bank’s deputy governor, said during a seminar for editors and reporters.

Adam Mugume, the Central Bank’s director for research, said Uganda’s economy and financial system had evolved in the past several years, making the targeting of money supply an ineffective economic tool.

Mugume said the bank will announce its CBR and inflationary targets monthly, starting July 4 this year.

“The current monetary framework doesn’t address other things like growth and interest rates,” he said.

The east African economy’s year-on-year inflation rate rose for a seventh straight month to 16.0% in May from 14.1% in April, its highest level since May 1994.

The central bank did not say whether the soaring inflationary pressures, which stoked violent protests in April and May, influenced the monetary policy change.

The shilling slid to an all-time low of 2,508 to the dollar on Tuesday, but has since reversed its losses after the central bank intervened by selling the US currency.

By Samuel Sanya : The New Vision Newspaper