Uganda Holds Rate at Record-Low 9% to Balance Prices, Growth

KAMPALA (Capital Markets in Africa) – Uganda’s central bank maintained its key interest rate at a record low as it seeks to balance rising inflation and the need to encourage economic growth.

The Monetary Policy Committee kept the benchmark rate at 9 percent, Governor Emmanuel Tumusiime-Mutebile told reporters Monday in the capital, Kampala.

The annual inflation rate rose to 3.1 percent in July, the highest level in seven months, as energy prices soared. The weaker shilling and higher costs of oil could boost price growth further, Tumusiime-Mutebile said. Core inflation will peak at about 6 percent or 7 percent in January to June next year, the second half of the country’s fiscal year, and will stabilize at about 5 percent by the end of 2019, he said.

Gross domestic product probably expanded 5.8 percent in the year that ended June 30 from 3.9 percent in the prior 12 months, Tumusiime-Mutebile said. It may accelerate to 6 percent in the year to end-June 2019.

Risks to the growth outlook include challenges relating to financing public-investment programs, escalating global trade tensions and the weak external-balance position, with the current-account deficit expanding to 5.8 percent of GDP in the year ended June from 3.4 percent 12 months earlier, he said.

Project Investment
Uganda, which discovered commercially viable oil deposits in 2006, is investing in projects such as roads and an airport in the oil region, plans a refinery and export crude pipeline ahead of the planned commencement of production in 2020. France’s Total SA, Cnooc Ltd. of China and London-based Tullow Oil Plc are jointly developing crude finds with 6.5 billion barrels of oil resource.

While public-investment programs will help raise output in the long run, funding them “can be formidable and may crowd out private investment and consumption, thus delaying the growth benefits of public investment,” he said.

Price pressures appear to be building, and policy makers will probably pause the easing cycle until the second half of next year, Yasemin Engin, an economist at Capital Economics Ltd. in London, said in an emailed note.

“The next move will be a 50 basis-point cut in the middle of next year,” Engin said.