Tuesday, August 11, 2015

Uganda: Lending rate increased to fight pre-election inflation surge

Uganda’s central bank on Monday hiked its key lending rate to 16% from 14.5% in its latest effort to dampen inflationary pressure ahead of general elections early next year.

Monday’s increase means Uganda’s policymakers have raised rates by 500 basis points since April—a dramatic tightening that highlights the gravity of the challenge to control surging prices.

Central bank governor Emmanuel Tumusiime-Mutebile told reporters in Kampala that forecasts show “elevated risks of inflation” driven mainly by the weakening of the local currency against the U.S. dollar.

“In light of the risks to higher inflation, Bank of Uganda believes that a tighter monetary policy stance is warranted” Mutebile said. “The future path of [the] exchange rate poses risk to inflation.”

Like many African currencies, the Ugandan shilling has been struggling against the dollar since the start of the year amid expectations that the U.S. Federal Reserve will begin raising interest rates later this year.

Aggravating the challenges for Africa’s largest coffee exporter—and upcoming oil producer—are fears of a spending spike ahead of the general elections. The country’s long serving leader Yoweri Museveni will be seeking a fifth term in office during the February elections but he faces a stiff challenge as opposition mounts to his attempt to extend his near-three-decade rule.

“The Uganda shilling is among the hardest hit currencies in sub-Saharan Africa, reflecting a shift in investor risk appetite for frontier market assets ahead of the approaching monetary policy normalization in the U.S.,” said Stephen Kaboyo a managing partner with Ugandan fund manager, Alpha Capital Partners.

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Last month, Uganda’s inflation rate rose to 5.4%, breaching the central Bank’s medium-term target for the first time in 14 months.

In June, Uganda’s finance minister Matia Kasaija announced a planned 70% rise in government spending before elections, stoking fears of a repeat of the 2011 election cycle during which high spending pushed inflation to an 18-year high, triggering months of street protests.

Analysts expect further policy tightening in the months leading to the general elections as authorities seek to control prices.

“The contractionary policy stance is yet to translate into disinflationary pressures,” said Jacques Nel, a Ugandan analyst with NKC Africa Economics “We could see further upward adjustments in the policy rate in coming months.”

Write to Nicholas Bariyo at nicholas.bariyo@wsj.com.


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