Uganda raises its benchmark rate as Kenya's remain unchanged

Tuesday September 3 2013

A Bank of Uganda information officer attends to visitors at her stand during a Banking and Insurance Expo in Kampala. BoU raised its benchmark rate to 12 per cent to mitigate against food inflation, while the Central Bank of Kenya (CBK) left its key lending rate unchanged. Photo/File

A Bank of Uganda information officer attends to visitors at her stand during a Banking and Insurance Expo in Kampala. BoU raised its benchmark rate to 12 per cent to mitigate against food inflation, while the Central Bank of Kenya (CBK) left its key lending rate unchanged. Photo/File Nation Media Group

By David Mugwe, The EastAfrican

Bank of Uganda (BoU) on Tuesday raised its benchmark rate to 12 per cent to mitigate against food inflation, while the Central Bank of Kenya (CBK) left its key lending rate unchanged citing instability in the Middle East and North Africa region which could affect local prices in the coming months.

BoU had kept the Central Bank Rate (CBR) unchanged at 11 per cent for the past two consecutive months and Tuesday’s increase marks the first in almost two years, while CBK’s 8.5 per cent rate which has been in effect since May will remain so till the next Monetary Policy Committee meeting in November.

Emmanuel Tumusiime-Mutebile, governor BoU in a statement said that Uganda is currently facing a supply side shock to agriculture which has raised food prices and that this may also impede real economic growth in the current 2013/14 financial year.

“The risks to the outlook for core inflation over the next twelve months, which is the target for monetary policy have clearly increased,” said Prof Tumusiime-Mutebile adding that the rise in food prices which has increased the cost of living has been caused mainly by drought.

The Uganda Bureau of Statistics last week said that the pace of price increases of basic goods and services rose to 7.3 per cent in August from 5.1 per cent in July reflecting the increased cost of food as a result of the food shortage caused by the drought.

“Although the outlook for inflation has worsened, BoU 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,” said Prof Tumusiime-Mutebile.

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BoU last increased the benchmark rate to 23 per cent from 20 per cent in November 2011 after the inflation rate – which is the pace at which prices of basics are going up – peaked at 30.5 per cent in October 2011 from 28.5 per cent in September 2011 and has since been on a downward trend.

CBK governor, Prof Njuguna Ndungu in a statement said that inflation in Kenya had remained within the current allowable margin of 2.5 per cent on either side of the Government’s medium-term target of 5 per cent while exchange rate stability was sustained.

The Kenya National Bureau of Statistics last week said that the cost of living in rose to 6.67 per cent in August from 6.02 per cent in July mainly due to an increase in fuel prices that pushed up kerosene, electricity and transport prices.

The governor said that there remain risks to the macroeconomic outlook attributed to weak economic activity in the Eurozone and instability in the Middle East and North Africa (MENA) which could worsen.

He said that following the instability in the MENA region, international oil prices rose between June and August contributing to the increase in domestic fuel prices adding that foreign exchange inflows from tea exports to the region, which account for about a third of Kenya’s tea exports, could also be affected.

“These developments coupled with the high current account deficit remain a threat to macroeconomic stability. Furthermore, implementation of the new VAT measures from this month will contribute to short-term increases in inflation, but the effects will be mild,” said Prof Ndungu.

Last Saturday, President Obama sent a letter to the United States Speaker of the House of Representatives and the President of the Senate requesting for the authorisation of military strikes on Syria which has been accused of using chemical weapons in the suburbs of Damascus killing more than 1,000 Syrians.

As a result of the crisis International futures prices on crude oil have over the past one month been hovering between $103.61 per barrel and $109.64 per barrel and the price increases are expected to affect Kenya which imports oil for domestic use.

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