Razia Khan, the regional head for research, Africa, at Standard Chartered Bank is surprised by the decision to increase the Central Bank Rate (CBR) by Bank of Uganda.
"The move is a surprise," Khan said in a note minutes after the August CBR was announced on Sept. 3. Governor Tumusiime Mutebile announced at a news conference in Kampala that he had raised the Central Bank Rate (CBR) to 12 percent in September from 11 percent in August in a bid to anchor inflation expectations and to support economic growth over the medium to long term.
Uganda's annual inflation for the year ended August 2013 rose to 7.3 percent, from 5.1 percent in July, after crop prices rose 16 percent in a month. Khan said inflation risks are now seen as more elevated relative to the previous assessment, even though the increase in core inflation remains modest.
"Nonetheless, with August inflation rising faster than expected, the BoU is taking seriously the risk of further pressure on prices," she said, adding although we expect inflation to rise further over the coming months, the shilling's continued strength should mean that the BoU can be measured in the pace of its tightening.
She said the anti- inflation credentials of the BoU will receive a boost from the rate increase, which should itself be an influence on where inflation peaks.