Uganda central bank cuts rate for second time on inflation

Uganda’s central bank cut its benchmark rate by 100 basis points to 15 percent, the second time this year, saying slowing inflationary pressure gave it room to ease monetary policy.

Consumer-price inflation in Africa’s biggest coffee producer slowed to 5.4 percent in May from an 8.5 percent peak in December. The Ugandan shilling has remained largely stable this year, strengthening 0.5 percent against the dollar.

“Given that inflation is forecast to fall back to the policy target of 5 percent over the next 12 months, the Bank of Uganda will reduce the CBR by 1 percentage point,” central bank Governor Emmanuel Tumusiime-Mutebile told reporters in the capital, Kampala.

Annual core inflation, which strips out food and energy prices, increased to 7 percent in May from 6.4 percent in the previous month. Food prices decelerated to 5 percent after a 4.2 percent drop previously.

The decision came as a surprise given higher international crude prices and expected monetary tightening in the U.S. later this year, according to Jacques Nel, a senior economist at NKC African Economists in Paarl, South Africa.

“While the outlook for the agricultural sector remains positive, it seems a bit premature to ease monetary conditions, particularly when considering that core inflation remains elevated,” Nel said by e-mail in response to queries.

The central bank also reduced the rediscount rate and the bank rate to 19 percent and 20 percent respectively. The reduction in interest rates is expected to trigger a drop in commercial interest rates by unlocking cheaper liquidity,  Bank of Uganda Executive Director for Research Adam Mugume told reporters.

“The easing is more to do with stimulating economic activity, especially private-sector credit,” Mugume said.

The central bank could cut the rate to 14 percent by the end of 2016, according to Stanbic Bank Uganda Ltd. Chief Executive Officer Patrick Mweheire.

Uganda, which hopes to start pumping oil in four years, estimates its economy could expand by 5.5 percent in the financial year through end-June 2017, from 4.6 percent in 2015-16, Finance Minister Matia Kasaija said in his annual budget speech last week.