Which way for Mutebile on Central Bank Rate?

Bank of Uganda governor Emmanuel Tumusiime- Mutebile.  

In Summary

Factor. Bank of Uganda awaits Fed decision.

Kampala. Today, the Monetary Policy Committee (MPC) will meet at Bank of Uganda (BOU) to decide on which direction the benchmark lending rate (Central Bank Rate) will go.

The meeting, initially slated for December 14, was moved forward as BoU awaited the Federal Reserve Bank of America decision on Wednesday. The Fed decision has an effect on the trend on the movement of the US dollar.
Since the start of the year, the MPC has adjusted the lending rate upwards mostly on forecasts that inflation will rise in the near future due to a weak Shilling.

Indeed, inflation has been on the rise. At the start of the year, inflation was at 1.2 per cent and by the end of November 2015, had gone up to 9.1 per cent.

For the best part of two months, the Uganda Shilling made gains on the dollar. From an all-time high of Shs3,693, the dollar by the second week of December was at about Shs3,340.

An African Economic Outlook 2016 report by Standard Chartered Bank says “more attractive yields following BoU tightening, improved investor confidence and increased investor inflows to Uganda have allowed the Uganda Shilling to appreciate significantly from its 2015 lows.”

A strong Shilling, according to analysts would mean a slowdown in the tightening of monetary policy.
“The performance of the Shilling in the last month has allowed interest rates to increase slower than expected. This, however, does not eliminate the need for a tighter monetary stance at the moment,” Mr Stephen Kaboyo, managing partner at Alpha Capital Partners told Daily Monitor yesterday.

Mr Enock Twinoburyo, an economist and research fellow at the University of South Africa, suggests BoU will raise the rate by between 0.5 or 1 percentage point because inflationary pressures still exist.

As the curtain draws up on Emmanuel Tumusiime Mutebile’s reign as BOU governor, he has a decision to make that will affect lending rates into the New Year, 2016. The New Year will come with elections and effects of the El Nino rains that will see food prices rise. A higher rate would mean interest rates by commercial banks rising, again, from an average of 25 per cent.

Shilling weakens
The Shilling started losing ground to the dollar at the end of last week. In some places around town, it was already in Shs3,500 range from Shs3,380 on Monday.

A Bank of Africa note revealed that this was because “Most market players have resorted to building US dollar positions as it is not certain if the shilling will easily reverse the trend.”

mmuhumuzai@ug.nationmedia.com