Uganda's central bank raises interest rates on inflationary pressure
TLDR
- Bank of Uganda raises interest rates to 10.25% for the second consecutive month to combat inflation and strengthen the shilling.
- Despite a slight decrease in inflation to 3.3% in March, global factors continue to pose inflationary pressures.
- BoU's deputy governor projects core inflation to rise to 6% with a target of returning to 5% by the second half of 2025.
The Bank of Uganda (BoU) has raised its interest rates for the second consecutive month, reaching 10.25%, the highest level in nearly seven years. This move comes as Uganda aims to tackle inflation and stabilize the depreciation of its currency, the shilling.
Despite a decrease in inflation to 3.3% in March from 3.4% in February, driven by a reduction in food inflation, policymakers remain cautious due to ongoing inflationary pressures influenced by global factors and exchange rate challenges.
Michael Atingi-Ego, BoU's deputy governor, highlighted in a virtual briefing on Monday that core inflation is expected to increase from 5.5% to 6% in the coming year, with a target of returning to 5% in the second half of 2025.
Points clés à retenir
East African central banks are prioritizing the anchoring of inflation expectations to mitigate the cost of living and work towards meeting the criteria for a single currency regime, known as macroeconomic convergence conditions. These conditions encompass maintaining a debt-to-GDP ratio of 50%, limiting the fiscal deficit (including grants) to 3% of GDP, ensuring overall inflation stays around eight percent, and holding forex reserves equivalent to 4.5 months of import cover. Inflation concerns and the depreciation of local currencies are significant factors influencing monetary policy decisions across the region's central banks. Ongoing challenges such as attacks in the Red Sea, a vital trade route, and the conflict in Ukraine pose additional inflationary risks, potentially leading to fresh adverse supply shocks that could impact the global economic recovery.
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