Weak Shilling drives up key lending rate

Kampala. Bank of Uganda yesterday raised its policy rate by one percentage point to 12 per cent from 11 per cent, on the account of economic risks from a higher inflation rate and persistent depreciation of the Shilling.

Presenting the monetary policy statement for the month of April 2015, the governor Bank of Uganda, Mr Emmanuel Tumusiime Mutebile, said: “The balance of payments is a source of weakness for the economy and this has been reflected in the pressures on the exchange rate in the last three months.”
“The current deficit remains large, and is likely to be in the region of 8.5 per cent of the Gross Domestic Product (GDP) in 201415, despite savings on the import bill as a result of low prices, whereas financial account inflows have weakened over the last few months,” he added.

In the last fiscal year 201314, Uganda’s current deficit stood at 6.2 per cent of the GDP which was equivalent to $1.2 billion. The rise to 8.5 per cent means that the total amount of money Uganda’s current deficit to the GDP will be $2 billion.
The Shilling has been depreciating against the US dollar since the second quarter of this financial year. Mr Mutebile said BoU will intervene in foreign exchange market to curb disruptive volatility in the exchange rate, as was the case in March 2015, but will not try to impede the real exchange from adjusting smoothly where this is needed to maintain external balance.”

“The depreciation of the exchange rate and faster real GDP growth will exert upward pressure on inflation over the medium term. BoU forecast that core inflation will rise to around 5 per cent by the middle of 2015 and, in the absence of adjustments to the monetary policy stance, will rise to a range of 7 to 9 per cent by June 2016,” he said.
BoU’s executive director of research, Dr Adam Mugume, said the rise in the Central Bank Rate makes credit more expensive and banks are likely to raise the lending rates.
“The price for money will be more expensive in the tight monetary policy which will cut off demand,” he said.


SOURCE: Daily Monitor


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