Uganda Hikes Rates First Time Since 2018 To Tame Inflation

Uganda Hikes Rates First Time Since 2018 to Tame Inflation

(Bloomberg) -- Uganda increased interest rates for the first time since October 2018 to counter accelerating inflation and support the weakening shilling.

The monetary policy committee raised the benchmark rate to 7.5% from 6.5%, Deputy Governor Michael Atingi-Ego told reporters Thursday.

“Inflation is increasing rapidly and is spreading broadly across the basket of consumer goods and services,” Atingi-Ego said. “The BoU will continue to raise the CBR until inflation is firmly contained around the medium-term target.”

Uganda's core inflation rate rose to the highest in five years last month, exceeding the central bank's 5% medium-term target for the first time since May 2017. Annual headline inflation is forecast to average 7%, and core inflation 6.1% this year, higher than earlier projections, Atingi-Ego said.

Food and fuel prices are surging because of Russia's war in Ukraine, while import costs are increasing as an investor exit from emerging markets dents the shilling.

“The weakening of the Uganda shilling against the US dollar coupled with rising food and energy prices have worsened the inflation outlook,” Atingi-Ego said.

The currency extended gains after the decision was announced and traded 0.9% stronger at 3,756.40 per dollar by 1:53 p.m. in Kampala, the capital.

Read: Central Bank Intervention Fails to Halt Ugandan Shilling Fall

The hike unwinds some of the 250 basis points of easing announced since 2020 to prop up the coronavirus-ravaged economy and is a further blow to consumers after President Yoweri Museveni ruled out cutting taxes or subsidizing imports.

Read: Tax Cuts, Subsidies on Fuel, Wheat Suicidal, Ugandan Leader Says

The central bank cut its economic growth forecast for Uganda this year to a range of 4.5% to 5%, compared with 5.5% to 6% earlier. The central bank will phase out the remaining credit-relief benefits for the education and hospitality sectors Sept. 30, and announced the end of pandemic-induced measures, including restrictions on dividend payments.

“Weaker external demand coupled with surging commodity prices, and the resultant high domestic inflation will lead to tighter monetary conditions, thereby constraining aggregate demand,” Atingi-Ego said.

Central bankers in emerging markets including Egypt and Kenya have been tightening monetary policy to anchor inflation expectations and attract investors seeking higher yields as the US, European and other central banks in developed markets tighten too.

Museveni has yet to name a new head of the Bank of Uganda after Emmanuel Tumusiime-Mutebile, Africa's longest-serving central bank governor, died in January.

(Updates with deputy governor's comments throughout)

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