KAMPALA, June 1 – Uganda’s central bank cut its key lending rate by 100 basis points to 20 percent on Friday, citing a steady easing of price pressures, and said further cuts would be needed to spur private credit growth and boost output.
Announcing the decision at a news conference, Bank of Uganda (BoU) Governor Emmanuel Tumusiime-Mutebile forecast the economy would expand between 5 to 6 percent in the 2012/13 fiscal year from an estimated 3.2 percent in 2011/12.
Some analysts had brought forward their predictions for a rate cut to this month after the year-on-year rate of inflation fell more than expected last month, reaching its lowest level in almost a year, helped by a fall in food prices in May.
Tumusiime-Mutebile said that while price pressures had eased steadily, proving that the bank’s tight monetary policy stance was working, real economic activity had “stagnated” during the 2011/12 fiscal year.
“Boosting real output growth will require a resumption of private sector credit growth, through a gradual reduction of interest rates over the next 6-12 months,” the governor said.
The Bank of Uganda won praise for ramping up its Central Bank Rate quickly as inflation accelerated in 2011, taking the key lending rate to 23 percent.
As inflation started to slow from a 2011 peak of over 30 percent in October, the central bank also began trimming its key rate, lopping one percentage point off in both February and March to leave it at 21 percent until this month.
But one of those moves prompted a sharp reverse in the shilling and the bank will need to keep a close eye on pressure on the currency, given renewed pressure on emerging markets due to the turmoil in the euro zone.
“The pace of easing that we expect following this will depend very much on how the (shilling) reacts to this latest move by the BoU,” said Razia Khan, head of Africa research at Standard Chartered.
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The shilling slumped as much as 8 percent after the March cut with the market feeling the loosening was premature.
On Friday, however, it held steady with leading commercial banks quoting the currency at 2505/15 after the central bank’s move, just a fraction weaker than the 2501/11 quoted ahead of the cut.
The governor said he was confident core inflation, which excludes food crops, fuel, electricity and metered water would reach the targetted single digits by the end of the year and 5 percent by mid 2013.
“With the BoU expecting that inflation will fall to single digits by the end of the year … there is clearly room for further easing in Uganda,” Khan said.
The governor said the regulator’s priority now was to ensure price pressures continued to slacken while allowing scope for a recovery of growth of aggregate demand to push real GDP back to its potential growth rate in 2012/2013.
The shaky global economy, he said, remained a significant source of risk for east Africa’s third biggest economy, with the euro zone turmoil posing a danger to Uganda’s exchange rate.
“Although BoU does not target a specific exchange rate, it will act decisively to avoid disruptive shocks to the exchange rate emanating from volatile short term capital flows,” he said. (Additional reporting by Richard Lough in Nairobi; Writing by Richard Lough; editing by Patrick Graham)