Inflation: Central Bank Raises Lending Rate


for sale geneva;”>”Although annual core inflation will probably remain above 6 percent for the next few months, stuff by tightening monetary policy now, I am confident that it will fall back towards our policy target of 5 percent by the third quarter of 2014,” Central Bank Governor Emmanuel Tumusiime-Mutebile told a news conference on Tuesday.

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He said the increase was to discourage economic agents from rising non food prices in response to the food price shock and should counter any rise in inflation expectations.

“I am fully aware of the potential impact of this on real sector activity. However, it is my strong view that this is a necessary action to anchor inflation expectations to support economic growth over the medium to long term.”

The lending rate had been at 11 percent the previous month.

Uganda is currently facing a supply side shock to agriculture which has raised food prices and may also impede real growth in 2013/14.

According to Mutebile, the risks to the outlook for core inflation over the next 12 months, which is the target for monetary policy, have clearly increased.

Core inflation is likely to be pushed up directly because the higher food prices affect items within the core basket, such as maize flour, and indirectly to the extent that higher food prices feed through to the general price level through cost push effects and through their impact on inflation expectations.

Inflation accelerated in August 2013 – food crop prices rose by 16 percent in August alone as a result of drought. This in turn shot up the headline inflation.

However, to the Central Bank, although the outlook for inflation has worsened, the Bank of Uganda does not expect a repeat of the inflationary surge which occurred in 2011, mainly because some of the casual factors which contributed to the rise in inflation in that year, such as rapid bank credit growth and a large exchange rate depreciation, do not pose the same threats in the current economic situation.


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