The Bank of Uganda raised interest rates for the second time in as many months on Monday, citing the risk of increased inflationary pressures due to a weak shilling.
The decision follows an emergency meeting last month when the central bank raised its benchmark interest rate to 10 per cent from 9.5 per cent to stem a “sharp depreciation” of the shilling caused by foreign investor outflows and curb rising inflation, ending a cautiously accommodative monetary policy that began last August.
The bank Monday raised its policy rate to 10.25 per cent, its highest level since May 2017. Explaining its decision, it said that despite the “prevailing conditions” of reduced demand and increased supply from producers, there was still a risk of high inflation.
This is due to “outflows of short-term foreign investor funds from the domestic market in search of attractive returns in other markets and strong domestic corporate demand”, it said. A weaker shilling almost always leads to higher prices in an economy like Uganda’s, where import outflows far outweigh export receipts, posing a risk of higher inflation.
“The evolution of inflation remains challenging, influenced by factors such as the shilling exchange rate, supply-side shocks, global inflation, and domestic food supply,” Bank of Uganda said. Even then, it lowered its long-term inflation forecasts because of what it says will be a stable shilling exchange rate, but raised short-term forecasts above its target.
“Short-term projections indicate inflation may rise to between 5.5 per cent to 6 per cent within 12 months ahead, with a return to the medium-term target of 5 per cent anticipated in the second half of 2025,” said the monetary policy statement.
The bank left its economic growth forecasts unchanged, although it noted that “recent high-frequency indicators” point to a slowdown in near-term expansion. “Uncertainty about the global economic outlook, the depreciation of the shilling and tight domestic financial conditions could dampen domestic demand,” it said.
