Uganda Makes Sub-Sahara's First Major Move to Tighten Policy

(Bloomberg) -- Uganda became the first major sub-Saharan African economy to increase interest rates this year to counter inflation pressures caused by a weakening currency and rising oil prices.

The Monetary Policy Committee in the east African nation increased the benchmark rate to 10 percent from 9 percent, central bank Governor Emmanuel Tumusiime-Mutebile told reporters Wednesday in the capital, Kampala. That is as inflation pressures have increased and price growth is projected to exceed its target, he said.

“A key risk to the inflation outlook is the shilling exchange rate, which remains vulnerable to the possibility of tighter global financial conditions as well as stronger domestic demand,” Tumusiime-Mutebile said. The weaker currency “combined with higher oil prices could result in a more elevated inflation trajectory,” he said.

The U.S. Federal Reserve has raised rates three times this year. That added to pressure on emerging-market assets and currencies that’s already taken a knock from the trade war between the U.S. and China and the recent turmoil in Turkey. The Ugandan shilling has weakened 4.5 percent against the dollar since the start of 2018.

Central bankers in Nigeria, Ghana, South Africa, Kenya and Angola kept key rates unchanged at their meetings in the past two weeks, signaling an end to the continent’s easing cycle. Policy makers warned of increasing price pressures and in South Africa, three of the seven MPC members favored tighter policy as the rand’s drop since March and an oil price that may be approaching $100 a barrel mean risks to the inflation outlook are tilted to the upside.

The Bank of Sierra Leone increased its benchmark rate in May and July.

While Uganda’s annual inflation rate slowed to 3.7 percent in September, it’s more than double the level it was at four months ago. The central bank targets inflation at 5 percent.

In Nigeria, inflation bottomed in July has been outside the target band for more than three years. South African Reserve Bank Deputy Governor Daniel Mminele said on Tuesday the risk of the nation’s inflation rate overshooting the 6 percent top limit of it target range should not be underestimated given the volatile global environment,

“The Bank of Uganda has always been one of the more forward-looking central banks in the region, and it is certainly living up to that reputation,” Razia Khan, head of macroeconomic research at Standard Chartered Bank Plc, said by email.

--With assistance from Ana Monteiro.

To contact the reporter on this story: Fred Ojambo in Kampala at fojambo@bloomberg.net

To contact the editors responsible for this story: Paul Richardson at pmrichardson@bloomberg.net, Rene Vollgraaff, Andre Janse van Vuuren

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