Uganda Holds Central Bank Rate at 21 percent for April

2-April-2012

Uganda's central bank left its key lending rate unchanged at 21 percent on Monday, saying that while inflation was declining risks to the outlook remained from food prices and a weak currency.

Announcing the decision at a news conference, Bank of Uganda (BoU) Governor Emmanuel Tumusiime-Mutebile said the central bank would start cutting interest rates again once it saw the risks to inflation ease.

Some analysts had expected a cut this time round after inflation dropped to 21.2 percent in March from 25.7 percent in February and gross domestic product data showed the economy contracting in the fourth quarter of 2011.

The shilling edged higher after Monday's decision. At 0957 GMT, it was quoted at 2,505/15, up from 2,515/25 ahead of the Monetary Policy Committee announcement.

"Global commodity exports, expecially oil, rose during March and this threatens to increase pressure on domestic inflation," the governor said in a statement.

"In addition, domestic food prices rose in both February and March because of drought and may increase further in April."

The Bank of Uganda won praise for ramping up its Central Bank Rate quickly as inflation accelerated in 2011, taking the key lending rate to 23 percent.

As inflation started to slow from a 2011 peak of over 30 percent in October, the central bank also began trimming its key rate, lopping one percentage point off in both February and March to leave it at 21 percent.

SHILLING WEAKNESS A FACTOR

However, the currency slumped as much as 8 percent after the March cut as some analysts thought it was slightly premature to carry on easing with inflation still above 25 percent.

There was also some speculation the governor might be forced to step aside due to graft allegations. He survived a parliamentary motion to remove him last month.

"The recent volatility ... around the Uganda shilling has clearly persuaded the central banker to stay his hand," said Aly Khan Satchu, a Nairobi-based independent analyst.

"The central banker in Uganda has been like the old Bundesbank and consistently ahead of the curve. I believe he is seeking to once again show his inflation busting credentials and, in the context of things, I think that is no bad thing," he said.

The governor said the central bank was committed to getting inflation back to its medium-term target of 5 percent.

"The Bank of Uganda still aims to reduce annual inflation to single digits by the end of this calendar year and to around 5 percent by mid 2013 and it will set its monetary policy to achieve this objective," the governor said.

"Once we see the risks to the inflation outlook receding, we will resume easing the monetary policy," he said.

Razia Khan, head of Africa research at Standard Charted Bank in London, said the central bank was likely to come under political pressure to ease rates, but given the governor's statement, there may not be quick cuts.

"The performance of the Ugandan shilling on the forex market now looks likely to be an additional and important factor influencing the pace of easing that we expect to see this year," she said.

"With oil prices as high as they are, the BoU will not risk macroeconomic stability for the sake of rapid easing."

Reuters