Uganda tightens interest rate to ward off threats to inflation target
A newly introduced tax on social media, rapidly rising oil prices and a weaker shilling exchange rate have all helped push up inflation
Kampala -Uganda’s central bank raised its key lending rate by 100 basis points to 10% on Wednesday, the first increase in three years, amid concern over rising inflationary pressures.
"Inflation is on an upward trajectory and core inflation is projected to rise above the target of 5% within the next 12 months," the Bank of Uganda’s (BoU) governor, Emmanuel Tumusiime-Mutebile, said.
Razia Khan, chief economist for Africa at Standard Chartered Bank, said it was no surprise that Kampala’s central bank raised the rate, given the likelihood that fuel price increases and a more volatile external environment pose a threat to the achievement of its inflation target in 2019.
"Growth in Uganda is also expanding, with more expansionary fiscal policy," Khan said. "Having not tightened in August, a rate hike of this magnitude makes sense."
A newly introduced tax on social media, rapidly rising oil prices and a weaker shilling exchange rate have all helped push up inflation, Tumusiime-Mutebile said, adding that easing domestic financial conditions and strong domestic demand would maintain a healthy growth momentum.
In July, Ugandan authorities introduced a levy on access to a range of social media platforms including Facebook, WhatsApp and Instagram.
"The strong rebound in economic growth in financial year 2017/2018 has closed the negative output gap, and with growth projected to remain robust in [full-year 2018/2019], core inflation could rise higher in the remaining part of the fiscal year," he said.
Core inflation, which the BoU monitors for monetary policy purposes and which excludes food, fuel, electricity and metered water, rose from 0.8% in June to 3.9% in September.
"The increase in core inflation was partly due to higher services prices, which rose sharply at the beginning of the financial year reflecting the effect" of the social media tax, Tumusiime-Mutebile said.
Core inflation is projected to rise to 6.5%-7.5% in the second half of 2019 if the current monetary stance is maintained, he said. "Given the objective of keeping inflation close to the target of 5% and the need to maintain economic growth, a modest tightening of monetary policy stance is warranted."
Since February, Uganda’s benchmark lending rate has been at 9%, its lowest since it began its inflation-targeting monetary policy.