Uganda Hikes Interest Rate to 7.5% to Tame Inflation

Uganda increased interest rates for the first time since October 2018 to counter accelerating inflation and support the weakening shilling.

The monetary policy committee raised the benchmark rate to 7.5% from 6.5%, Deputy Governor Michael Atingi-Ego told reporters Thursday.

“Inflation is increasing rapidly and is spreading broadly across the basket of consumer goods and services. The BoU will continue to raise the CBR until inflation is firmly contained around the medium-term target.” Deputy Governor Michael Atingi-Ego

Uganda’s core inflation rate rose to the highest in five years last month, exceeding the central bank’s 5% medium-term target for the first time since May 2017. Annual headline inflation is forecast to average 7%, and core inflation 6.1% this year, higher than earlier projections, Atingi-Ego said. 

Food and fuel prices are surging because of Russia’s war in Ukraine, while import costs are increasing as an investor exit from emerging markets dents the shilling.

“The weakening of the Uganda shilling against the US dollar coupled with rising food and energy prices have worsened the inflation outlook,” Atingi-Ego.

The currency extended gains after the decision was announced and traded 0.9% stronger at 3,756.40 per dollar by 1:53 p.m. in Kampala, the capital.

The central bank cut its economic growth forecast for Uganda this year to a range of 4.5% to 5%, compared with 5.5% to 6% earlier. The central bank will phase out the remaining credit-relief benefits for the education and hospitality sectors on Sept. 30, and announce the end of pandemic-induced measures, including restrictions on dividend payments.

“Weaker external demand coupled with surging commodity prices, and the resultant high domestic inflation will lead to tighter monetary conditions, thereby constraining aggregate demand,” Atingi-Ego. 

Read also; Uganda introduces New Electronic Passports.

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