Uganda cuts interest rates again as inflationary pressures ease - CNBC Africa

Uganda cuts interest rates again as inflationary pressures ease

East Africa

by Reuters 0

BoU said the bank expected growth to accelerate to 5.5 percent in the fiscal year ending June 2017. Photo: Flickr.

Uganda's central bank cut interest rates on Monday, saying a stable shilling had dampened inflation as it faced calls to also bring down debt auction yields to help the monetary easing feed through to the broader economy.

Making its third cut since April and signalling further reductions ahead, the central Bank of Uganda (BoU) lowered the benchmark policy rate by 100 basis points to 14 percent, stepping up efforts to boost growth after the economy shrank in the first quarter from the previous one, hurt by a fall in agricultural output.

BoU governor Emmanuel Tumusiime-Mutebile said the bank expected growth to accelerate to 5.5 percent in the fiscal year ending June 2017, from a forecast 4.6 percent in 2015/16.

Annual headline and core inflation were likely to drop by the end of 2016.

"Given that inflation is forecast to stabilise around the policy target (of 5 percent)... over the next six months, the Bank of Uganda believes that a continued easing of monetary policy is warranted," he said.

That would also help to support a recovery of private sector credit, he added.

A trader at a leading commercial bank in the capital Kampala said the BoU was sending mixed signals, lowering the benchmark rate while allowing yields on Treasury bills and bonds to remain high.

In such circumstances, "banks won't find it appealing to drop lending rates," he said.

Although debt auction yields are in theory market-detemined, in practice the BoU often influences them via carefully timed liquidity mop-ups or injections.

Yields on five-, and 15-year notes rose at the last bond sale on July 13, while yields on Treasury bills have also trended higher.

Year-on-year headline inflation fell to 5.1 percent in July, from 5.9 percent the previous month, helped by slowing fuel prices. Core inflation, which strips out food, fuel and metered water, dropped to 5.7 percent from a revised 6.8 percent.

The central bank, which uses the core reading as its monetary policy yardstick, holds its next policy meeting in October.

Comments