Inflation Effects! Bank Of Uganda Raises Key Rate By 100 Basis Points

Inflation Effects! Bank Of Uganda Raises Key Rate By 100 Basis Points

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By Spy Uganda

Uganda’s central bank raised its key interest rate to the highest level since 2019 and signalled more hikes are ahead unless rampant inflation is brought under control.

The monetary policy committee increased the benchmark rate for a fourth straight meeting to 10% from 9%, Deputy Governor Michael Atingi-Ego told reporters on  Thursday in the capital, Kampala.

That takes cumulative rate increases since June to 350 basis points, making it one of six central banks on the continent that have hiked by 3 percentage points or more this year.

“The Bank of Uganda remains determined to rein in on inflation and will continue to undertake the necessary measures to restore inflation to its target of 5% in the medium term,” Atingi-Ego said.

Annual core inflation, which strips out food and energy costs, has been above the central bank’s 5% medium-term target since May and at 8.1% is at the highest level in a decade. Headline price growth quickened to 10% in September from 9% in the previous month.

The MPC sees headline inflation averaging 7.3% in 2022 and in a range of 8% to 10% in 2023, before declining back to the target in 2024, Atingi-Ego said.

The outlook for price growth is highly uncertain with the balance of risks still titled upwards, Atingi-Ego said. Still, the MPC forecasts inflation pressures will peak in the first half of next year as Covid-19 effects wane and supply-chain pressures ease and because of recent monetary and fiscal policy actions that have stabilized the exchange rate, he said.

Risks range from the entrenchment of higher inflation expectations and stronger monetary tightening by major central banks further weakening of the exchange rate, he said.

The decision aligns the Bank of Uganda with rate setters across the world that are raising borrowing costs at the fastest pace in a generation to remain in sync with the US Federal Reserve in smothering inflation, even at the expense of economic growth and attracting investors to strengthen their currencies and reduce import costs.

Uganda is one of the few central banks whose inflation-adjusted interest rate is at zero.

The central bank cut its economic growth forecast in August to 2.5% to 3% for 2022, from a previous estimate of 4.5% to 5%.

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