Uganda Central Bank Cuts Benchmark Lending Rate to 20%

Uganda’s central bank cut its benchmark interest rate by 1 percentage point, the third reduction this year, to support economic growth as inflation slows.

The Bank of Uganda lowered the policy rate to 20 percent from 21 percent, Governor Emmanuel Tumusiime-Mutebile told reporters today in the capital, Kampala. The bank raised the rate by 10 percentage points between July and December.

Growth in East Africa’s third-largest economy probably slowed to 3.2 percent in the year through June, from 6.7 percent in the previous 12 months, the statistics office said yesterday. At the same time inflation has fallen as the impact of last year’s drought eased, giving the central bank room to lower interest rates to bolster the economy.

“Boosting real output growth will require a resumption of private sector credit growth through a gradual reduction of interest rates over the next six to 12 months,” the governor said. The economy’s expansion is less than potential growth of 6 percent to 7 percent, he said.

The euro crisis remains of concern to the East African nation, with fears that it could trigger renewed turbulence in the global financial market, hurting the local currency, Tumusiime-Mutebile said. The bank will “act decisively to avoid disruptive shocks to the exchange rate emanating from volatile short term capital flows,” he said.
Pressure for Stimulus

Inflation slowed to 18.6 percent in May from 20 percent in the previous month, the statistics office said yesterday. The underlying inflation rate, which excludes food crops, fuel, electricity and metered water, fell to 21.2 percent from 22.8 percent in the same period.

“Recent gross domestic product estimates for the fiscal year have been much softer than in previous years,” Razia Khan, head of Africa economic research at Standard Chartered Plc in London, said in an e-mail before today’s decision. “It will increase the pressure on the Bank of Uganda to cut rates to provide new stimulus to the economy.”

Growth may recover to 5 to 6 percent in the 12 months through June next year, the governor said.

Shilling-denominated loans contracted sharply in the past financial year because of high interest rates, Adam Mugume, the executive director of research at the central bank, told reporters today in Kampala.

“Growth of 3.2 percent this season is very worrying, calling for the central bank to unlock credit growth,” Arthur Nsiko, a researcher at African Alliance Uganda Ltd., an investment advisory company, said in an interview in Kampala.

Uganda’s shilling dropped 0.3 percent against the dollar and traded at 2,505 as of 2:33 p.m. in Kampala today.

Bloomberg
01 June 2012