Uganda Central Bank Keeps Lending Rate at 21 percent for Third Straight Month

Uganda's central bank Wednesday left its key interest rate on hold for a third straight month on concern increases in food and fuel prices may push up the overall inflation rate after sparking riots last year.

While consumer price growth had slowed, it now showed signs of accelerating, Bank of Uganda Governor Emmanuel Mutebile said after policy members announced their decision to keep the main rate at 21%, the same level as in March and April.

"The main risk to the continued falls in inflation is the upward surge in food prices since February 2012," Mutebile said at a press conference at the central bank's headquarters in Kampala. "Food prices could rise further between May and July," he said. The main harvest in western and southern Uganda for crops including corn, millet and beans starts in July. Weakness of Uganda's currency, the shilling, also threatened price stability, he said.

While the East African country's year-on-year inflation rate fell to 20.3% in April from 21.1% in March, month-on-month food-crop inflation averaged 7.2% from February through April, compared with average monthly deflation of 2.9% in December through January, the central bank said.

Food and fuel inflation sparked riots across the country last year, threatening to topple its long serving leader, Yoweri Musevenas, as drought reduced crop yields. In July, the central bank announced an inflation-targeting policy as part of an effort to control prices. Corn exports to the World Food Program and regional countries including Kenya, South Sudan and Congo dropped around 230,000 metric tons from 330,000 tons a year, according to Agriculture Ministry data.

Output from the main food harvest for the central and eastern parts of the country in November-December was lower than expected, and although food prices initially dropped after the harvest, they started to rise again around February, Mutebile said at the press conference. Uganda's food production is dominated by smallholder farmers, whose yields are determined by changing weather patterns.

The state-run Uganda Bureau of Statistics said last month that the economy contracted 2.3% in the third quarter of last year, from the previous quarter and shrank 1.1% on the year, because of slower growth of the construction and manufacturing sectors. Uganda, Africa's largest coffee exporter, is preparing to start oil production next year along its western border with Congo.

The shilling depreciated to a record low of UGX2,900 per dollar in September from around UGX2,200 in January 2011. It traded at UGX2,495 against the dollar on Monday, according to data provided by Stanchart Bank Uganda Ltd.

Dow Jones Newswires
2-April-2012