Uganda Lending Rates set to rise again

Monday July 4, 2011

The tight monetary stance being observed by the Bank of Uganda (BOU) is poised to push lending rates up, a top official said over the weekend.

“The three-day interbank rate has risen to 14% from 3% just before I left office (on Friday). This is a clear indication of the current tight monetary policy. Before long, you will see prime lending rates going up,” Dr. Louis Kasekende, the deputy BOU governor, said at the annual Uganda Institute of Banking and Financial Services dinner in Kampala.

Several commercial banks have already adjusted their prime lending rates from 18.5% to between 19.5% and 20.5%

Kasekende said the policy tightening would be consistent with a gradual decline of inflation over the next 12 months.

He made an analysis of the June inflation rate, noting that supply shocks were central to the general price rise, even more than the weak exchange rate.

“The main causes of the current inflation are the supply shocks,which have affected domestic and external food markets and, to a lesser extent, the rise in global fuel prices and the depreciation of the shilling,” he explained.

The shilling closed at 2,600 on Friday from a high of 2,750 on Thursday. Kasekende cautioned against an overly aggressive monetary tightening, saying it could lower economic growth.He said the commercial production of oil would significantly improve the current account and strengthen exchange rate.

A current account means the difference between the dollars a country needs to finance imports of goods and services and what it earns from exports.

A country’s earnings should exceed its demand for dollars.

Kasekende was optimistic that forex shortages would end when oil production begins.

“We expect large inflows from oil. Chances are that the balance of payment will change and impact on the exchange rate in the medium to long-term. But in the short-term, we expect the exchange rate to remain under stress,” he noted.

Philip Odera, the Stanbic Bank chief, urged the industry players to increase agriculture lending to boost exchange rate.

“We should accelerate our lending to the agricultural sector especially those areas that boost exports to improve the balance of payment and exchange rate,” he remarked.

BOU’s plan to shift monetary policy to target inflation rather than money supply by introducing a Central Bank interest rate (CRB) today, is expected to stabilise interbank rates, but markets may struggle to adapt, analysts said.

The bank had traditionally watched the amount of money in circulation in line with the level of economic activity instead of focusing on price stability.

“Right now, we don’t have any kind of index to help determine interbank rates,” Faisal Bukenya, the head of market making at Barclays Bank, said. “Rates have been so unstable and unpredictable. The key rate will certainly help stabilise our interbank rates,” he said.

Bukenya said the new policy would strengthen BOU’s muscle to regulate financial markets and curb inflation.Uganda has been plagued by rising inflation and a weakening shilling in recent months.

Lucas Ochieng, the treasurer at Orient Bank, said the CRB would control liquidity, but he was worried that investors would stop buying one-year treasury bills due to a high inflation rate.

“They need to inject liquidity into the market. Banks lost a lot of shillings during elections, which has created a strain,” he said.

President Yoweri Museveni won re-election in February amid heavy criticism from donors and lenders of the undisclosed amount of money spent on his campaign.

The country’s year-on-year rate of inflation fell for the first time in eight months in June to 15.8% from 16% in May, helped by a fall in food prices.

Huge demand for the dollar and speculative trading have driven the shilling down for much of the first half of the year.

The Central Bank says the economy and financial system has evolved in recent years, rendering the targeting of money supply an ineffective economic tool.

“The market will take time to absorb the new system, but the CBR will help in rendering greater predictability to BOU’s policy stance and objectives so that the market can respond accordingly,” Nicholas Malaki, an analyst, said.

“Currently, they just come in to mop up excess liquidity, which doesn’t offer any useful information that can guide market players.”

By Samuel Sanya: The New Vision Newspaper