Uganda shilling weaker after rate cut, Bank of Uganda limits damage

Uganda's shilling weakened slightly against the dollar on Friday but was spared heavier losses when the central bank sold dollars as investors bet it would cut its key lending rate.

The shilling's first trade of the day was at 2,500.00 per dollar but it quickly fell to an intra-day traded low of 2,525.05, prompting the central bank's sale of dollars which left the currency yo-yoing around 2,510 just ahead of the rate decision.

The Bank of Uganda cut its key lending rate by 100 basis points to 20 percent, citing a steady easing of price pressures, and said further cuts would be needed to spur private credit growth and boost output.

A cut became more likely, analysts said, after May consumer price data released on Thursday showed price increases easing quicker than expected.

"It was a classic case of reading the message through a sealed envelope," said Ahmed Kalule, a trader at Bank of Africa.

"Speculation on the rate cut undermined the shilling so sharply the central bank had to intervene to push it back... had the bank not come in we would have seen a deeper plunge after the actual cut."

At 1300 GMT commercial banks quoted the currency of east Africa's third-largest economy at 2,500/2,520 compared with Thursday's close of 2,495/2,505.

Governor Emmanuel Tumusiime-Mutebile forecast the economy would expand between 5 to 6 percent in the 2012/13 fiscal year from an estimated 3.2 percent in 2011/12.

Even so, Faisal Bukenya, head of market making at Barclays bank, Uganda, said the shilling would remain under-pressure in the near term.

"To me all the negative factors seem to be converging on the shilling," said Faisal Bukenya, head of market making at Barclays Bank.

"Yields are coming off, interest rates are falling and economic growth is faltering at least in the short term so clearly the shilling will be downward going forward."

Razia Khan, head of Africa research at Standard Chartered in London said there was room for further easing but that the pace of loosening would depend on how the shilling reacted to the June rate cut.

In March, the shilling slumped 8 percent when the market felt the bank's one percentage point cut was premature.

Reuters
01 June 2012