Uganda inflation tumbles, paves way for rate cut

Reuters    Translate This Article
31 July 2012

KAMPALA (Reuters) - Uganda's year-on-year inflation fell for the fifth straight month to 14.3 percent in July from 18.0 percent in June, thanks to a drop in food prices, the statistics office said on Tuesday, opening the way for more rate cuts.

Like other east African nations, the coffee-producing nation of 33 million people suffered from high inflation and a sharp weakening of the currency against the dollar, causing popular protests in 2011 that turned violent as police broke them up.

But the rate of inflation has been falling in recent months on the back of very tight monetary polices as well as base effects due to comparison with last year's inflation, falling to its lowest in 14 months in July.

'Going forward we should expect a gradual slowdown in inflation. We might not see a sharp move like this one, which was caused by the harvest season going on,' said Christopher Makombe, a trader at Standard Chartered bank.

The Uganda Bureau of Statistics said substantial declines in the prices of Irish potatoes, beans, vegetables, rice and fish were recorded during the month.

Core inflation fell to 15.4 percent from a revised 19.6 percent in the previous month, the statistics office added, firmly pointing to a rate cut when policymakers meet on August2.

'It has increased possibility of a further cut in the Bank of Uganda rate,' said Makombe.

'We might see a knee-jack reaction in the shilling when they cut, but it may go back to the current levels because offshore (investors) are still keen on Uganda debt.'

The Bank of Uganda won praise for ramping up its Central Bank Rate quickly as inflation accelerated in 2011, taking the key lending rate to 23 percent.

As inflation started to slow from a 2011 peak of over 30 percent in October, the central bank also began trimming its key rate, lopping one percentage point off in both February and March to leave it at 21 percent until this month.

'The high base effect from last year is now a factor and I think the Uganda central bank need to be cut and cut sharply,' said Aly Khan Satchu, an independent trader and analyst in Nairobi, adding high rates could pull in hot money from abroad.

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