Uganda’s Central Bank raises policy rate to 8.5% as inflation bites

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Uganda’s Central Bank has raised its benchmark policy rate by one percent to 8.5 percent in a radical move. This was occasioned by panic amidst surging inflation levels and increased pressure exerted by the US dollar against the local currency as a result of spikes in interest rates registered by developed economies.

This development follows a sudden monetary policy committee meeting held on Tuesday on the back of latest inflation data, signs of vulnerability exhibited by the local currency against the US dollar, and raging uncertainty over global supply chain shocks caused by the ongoing Russia-Ukraine military conflict.

The latest one percent increase in the Central Bank Rate (CBR) comes on the heels of a previous one percent increment announced last month. Besides growing worries pegged to rising commodity prices, increased interest rates tied to treasury bills and bonds plus trading patterns recorded by the local shilling against the US dollar could dominate the Central Bank’s policy radar in the aftermath of the policy announcement.“Inflation continues to rise, largely influenced by external cost pressures stemming from higher global food and energy prices, persisting global production and distribution challenges, as well as rising domestic food crop prices due to dry weather across the country…Annual food crop inflation has sharply risen from 0.7 percent in February 2022 to 14.5 percent in June 2022…The MPC considers that the monetary policy stance will have to be tightened even further so as to ensure that inflation eases back to target in the medium-term…” reads Bank of Uganda (BOU)’s latest monetary policy statement.

The Uganda shilling rose by around Ush30 ($0.008) against the US dollar a few hours after the policy rate announcement and closed at Ush3,718 against the green buck on Tuesday.“The Central Bank may be constrained in tackling supply side driven price shocks but its mandate on matters of ensuring price stability remains. The one percent increase in the CBR seems inevitable to us in a situation of surging inflation. The government raised Ush1.4 trillion ($373.1 million) from the local debt market in June through scheduled bond auctions and also mobilised another Ush748 billion ($199.3 million) through an unscheduled Treasury Bond auction done last month. Those moves have ignited increases in interest rates earned on Treasury bonds of late and this has helped retain some offshore investor interest in this market,” said Benoni Okwenje, the General Manager for Financial Markets at Centenary Bank Limited.

Offshore investors currently hold less than 12 percent of the overall stock of outstanding Treasury bills and bonds valued at more than Ush10 trillion ($2.6 billion) to date, government data shows.