Uganda Reduces Key Rate to 13 Percent to Support Economy

The Bank of Uganda lowered its benchmark interest rate by 100 basis points to 13 percent, saying slowing inflation gave it room to support flagging growth.

Two of three analysts surveyed by Bloomberg predicted the reduction, while one expected policy makers to keep the benchmark rate at 14 percent. The monetary policy committee has cut the rate by a total 300 basis points in the past three meetings.

“Given that core inflation is forecast to remain around the medium-term target of 5 percent over the next 12 months, there is room to support the domestic economic growth momentum especially against the global economic slowdown,” Governor Emmanuel Tumusiime-Mutebile told reporters in the capital, Kampala. “Therefore, the BOU believes that there is scope to ease monetary policy.”

Further Easing

Uganda may lower the central bank rate by another percentage point at the next meeting in December, according to Razia Khan, head of Africa research at Standard Chartered Bank Plc. It will then probably hold it until the third quarter of 2017, when there may be scope for more modest easing, she said in an e-mailed note after the decision.

“Despite sounding a note of caution over the impact of the drought on food prices, we believe that inflation is low enough to justify further easing in order to support credit and economic growth,” Khan said.

While the rate of inflation has slowed, economic growth has not been as robust as last year after agricultural output contracted. Overall expansion in Africa’s biggest coffee exporter came in at 3.9 percent in the second quarter, compared with 5.4 percent in the second quarter of 2015 and 4.1 percent in the first three months of 2016, according to the Uganda Bureau of Statistics. Consumer prices rose 4.2 percent last month, after increasing 4.8 percent in August.