Uganda holds lending rate, says inflation peaked

KAMPALA (Reuters) - Uganda's central bank kept its benchmark lending rate unchanged at 23 percent on Friday, citing a possible peak in inflation, which slowed for the first time since June last month.

Central bank embarked on an aggressive tightening stance in August, raising rates four times in a row, after they launched the benchmark lending rate in July at 13 percent.

Inflation jumped to an 18-year-high in October, before edging down to 29 percent in November, pointing to the effectiveness of the tightening measures, policymakers said.

"There are now clear signs that inflation has peaked and inflation pressures have started to abate," Emmanuel Tumusiime-Mutebile, central bank governor, told reporters.

"It would be premature to loosen monetary policy until significant falls in annual inflation rates have been achieved ... consequently the BoU (Bank of Uganda) will maintain the Central Bank Rate at 23 percent," he added.

Tumusiime-Mutebile said the decline in credit growth and the strengthening of the shilling against the dollar were proof the tightening measures were effective.

An analyst at a leading commercial bank said BoU had taken into account the need for balance in its anti-inflation measures

and support for economic growth, when they set the rate for this month.

"Inflation is clearly still high vis-à-vis the target but BoU has a challenge of taming inflation while simultaneously promoting economic growth. They decided any further hikes would be detrimental to the economy," he said.

Although inflation recorded a modest monthly rise in November, the pace of increase has been slowing.

The central bank said in July it was targeting core inflation of 5 percent in the next 12 to 24 months.

Central bank expects headline inflation to drop to between 16-20 percent and core inflation to decline to about 20 percent by June 2012.

Tumusiime-Mutebile said BoU's data indicated policy tightening had helped slow private credit growth starting in October.

"This deceleration continued through the first half of November as a result of the increase in bank lending rates. The slowing down of bank credit growth will help to ameliorate inflationary pressures over the coming months," he said.

Arthur Nsiko, research analyst at African Alliance said it was prudent to hold the rate to keep a lid on lending.

"Already there's a risk of an upsurge in inflation from the holiday shopping frenzy... so even if inflation declined in November, cutting the rate would exacerbate the risk of having fresh price pressures," he said.

Central bank said the shilling had appreciated by 8 percent against the dollar in November and that if the local currency's upward momentum was sustained, it would further dampen inflationary pressures.