Ugandan shilling gains ground as central bank intervenes

Ugandan shilling gains ground as Central Bank intervenes

Kampala, Uganda | By Michael Wandati | For the second consecutive time, the Bank of Uganda has opted to raise its key monetary rate, this time by 25 basis points, in an effort to mitigate a surge in the prices of goods and services and to stabilize the depreciation of the shilling.

In its latest move for April 2024, the Bank of Uganda increased its Central Bank rate to 10.25 per cent, aiming to address the decline of the shilling against the dollar.

Over the past month, the shilling has faced significant pressure, nearly breaching the psychological threshold of Shs 4,000, driven by foreign investors shifting away from Uganda towards more profitable capital markets offering better returns on investments.

Michael Atingi-Ego, the deputy governor of the Bank of Uganda, highlighted the vulnerability of the shilling due to the outflow of short-term foreign investments from the local market and robust domestic demand from corporates. He emphasized that the shilling’s depreciation significantly impacts domestic prices, potentially leading to higher inflation.

Atingi-Ego elaborated on the challenges influencing inflation, citing factors such as exchange rate fluctuations, supply-side disruptions, global inflation trends, and domestic food supply dynamics.

The decision to increase the key monetary rate in March resulted in a moderate appreciation of the shilling. However, it was deemed insufficient to sustain the desired level, necessitating further tightening of monetary policy for effective interpretation of the central bank’s actions.

Furthermore, the central bank observed that the shilling’s appreciation coincided with a slight decrease in the percentage change of overall prices, reflected in headline inflation dropping from 3.4 per cent in February to 3.3 per cent in March.

This decline was primarily attributed to a reduction in food prices, a significant component in inflation calculations. The central bank’s decision to tighten monetary policy further was partly influenced by this inflation trend, aiming to absorb excess liquidity in the economy.

Also Read: Kenyan shilling gains ground against Uganda, Tanzania currencies

Atingi-Ego reiterated the central bank’s concern regarding potential vulnerabilities in the inflation outlook, with forecasts indicating a potential rise to between 5.5 per cent and 6 per cent over the next year before converging within the target range of 5 per cent thereafter.

Inflation is a critical economic indicator, impacting consumer purchasing power and necessitating adjustments in spending patterns to accommodate rising prices.

Additionally, elevated inflation levels tend to increase borrowing costs for businesses, potentially leading to reduced investment activity and, in severe cases, workforce reductions.