Uganda cuts key lending rate

2012-11-01 16:03

Kampala - Uganda’s central bank cut its key lending rate for the sixth straight month on Thursday to 12.5% from 13% previously, the bank’s governor said.

Robert Aloo, head of treasury at KCB-Uganda said he expected the key lending rate to remain flat.

"The 50 basis point cut is not a surprise. It is positive since inflation is going down, but it's giving the market mixed signals since the central bank accepted bid rates as high as 20% at the Treasury bills auction yesterday."

Janine Botha of NKC Independent economists said given the deceleration seen in inflation in October, the expectation was for a further easing of monetary policy.

“Although the degree to which was notably less aggressive than seen in recent months, the 50 bps cut to 12.5% was in line with expectations, as the Bank of Uganda attempts to stimulate a recovery in aggregate demand in order to boost real growth on the one hand, while at the same time provide some measure of support for the local shilling.”

Razia Khan, head of Africa research at Standard Chartered said the latest cut was at a slower pace than what she'd expected.

Standard Chartered expected a 100 bps - "so it’s an even slower pace of easing that we had anticipated", she said.

"However, the reasons behind the rate cut of this magnitude are easy to understand. On the one hand, Uganda’s economy continues to perform below potential, and the authorities are keen that banks reduce their lending rates further in order to boost growth.

"On the other, with the current account deficit still substantial, and clear risks to the Uganda shilling from too aggressive a pace of easing, there was some need for a more cautious approach. The BOU will continue to intervene in the FX (foreign exchange) market to stabilise the UGX.

"Given that inflation is in low single digits, we continue to anticipate interest rate easing into H1 next year, but perhaps at the more moderate pace of 50 bps at a time. This is fitting with what the economy requires and should not pose a big risk to the FX outlook," said Khan.