News and Views

Uganda cuts key rate, shilling seen under less pressure

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By Elias Biryabarema

Nov 1 (Reuters) – Uganda’s central bank cut its key lending rate for the sixth straight month on Thursday though by less than expected, in a move analysts said bodes well for the previously weak shilling.

Investor interest in the east African economy rose when it struck oil in 2006 and on the back of government forecasts of double digit economic growth once production starts.

Bank of Uganda has been easing its monetary policy stance since early this year, saying it was keen to spur a recovery in consumer spending and a return of the country to its growth potential. Uganda’s economy has suffered power supply problems and an inflation spike recently.

The bank cut its benchmark Central Bank Rate (CBR) but by 50 basis points to 12.5 percent for November, from October’s 13 percent, below the 100 basis points that most traders had expected.

“With the current account deficit still substantial, and clear risks to the Ugandan shilling from too aggressive a pace of easing, there was some need for a more cautious approach,” said Razia Khan, head of Africa Research at Standard Chartered Bank.

“This is fitting with what the economy requires and should not pose a big risk to the FX outlook.”

The Ugandan shilling was little changed after the rate decision, with commercial banks quoting it at 2,580/2,590, from Wednesday’s close of 2,578/2,588.

The Bank of Uganda has been easing its monetary policy stance since early this year, saying it was keen to spur a recovery in consumer spending and return economic growth to its full potential.

Previous rate cuts have gradually weakened the shilling, which has lost 3.8 percent of its value against the dollar in the year to date.

Governor Emmanuel Tumusiime-Mutebile told a news conference there were indications that lending to the private sector was starting to pick up, albeit at a slow pace.

He said in the short term, monetary policy would continue to focus on stimulating aggregate demand.

“The forecast that core inflation will stabilise around 5 percent over the next three quarters, provides room for a modest reduction … in November,” Tumusiime-Mutebile said.

“I believe that with this reduction, the CBR is now approaching the level which is consistent with the medium-term inflation target of 5.0 percent.”

The modest rate cut followed a slowdown in Uganda’s headline inflation rate which eased to 4.5 percent in October from a revised 5.5 percent in September, helped by lower food costs.

Tumusiime-Mutebile said although Uganda’s economic growth is projected to rise to 5 percent in the 2012/13 fiscal year from 3.4 percent in the previous year, such an acceleration would still be below the desired target of 6.5-7.0 percent.

“We expect this (inflation-targeting regime), and a desire to maintain a degree of exchange-rate stability, to take precedence over supporting economic growth for the BOU going into 2013, limiting the scope for further rate cuts,” said Mark Bohlund, senior economist at Sub-Saharan Africa IHS Global Insight. (Editing by George Obulutsa, Ron Askew)

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