Bank of Uganda Tuesday raised its key lending rate by a full percentage point to 13 per cent, expanding economic activity and other economic fundamentals.
The shilling has lost more than 5 per cent of value against the dollar over the last one month on the back of low foreign exchange inflows and reducing export volumes.
Last week during the 2015/16 Budget government announced a 70 percent increase in spending, a move attributed to increased borrowing to finance major infrastructure projects. Many experts however linked it the coming elections starting October.
The market has also been bogged by low investor appetite as many have chosen to stay on the sidelines to watch goings-on ahead of the 2016 elections.
In May inflation rose to 4.9 per cent on the back of low food supplies and increasing product prices.
Core inflation, which excludes food, fuel, electricity and metered water, was 4.8 percent.
Announcing the increase in the Central Bank Rate, Bank of Uganda governor, Emmanuel Tumusiime-Mutebile, said he expected core inflation, which the bank focuses on to set policy, to reach 8 to 10 percent by end of fiscal 2015/16.
“Much of the increase in core inflation is attributed to the currency depreciation and inflation expectations,” he said.
Bank of Uganda also raised the lending rates to 12 per cent in April, forcing commercial banks to increase interest to a market average of 23 per cent.