Shilling strengthens on expectations of rate increase

folarin okunola

November 2, 2015 4:34 PM

At 0951GMT, commercial banks quoted the shilling at 3,550/3,560, stronger than Friday's close of 3,560/3,570.

The Ugandan shilling rose on Monday as commercial banks trimmed their hard currency positions amid concern soaring consumer prices will spur policymakers to raise interest rates.

"People are worried about the direction of inflation," said Ahmed Kalule, a trader at Bank of Africa. "Traders are thinking the direction of inflation will force the central bank to do another round of tightening."

As a result of those worries, Kalule said, some commercial banks were exiting their dollar positions, anticipating a rise in the cost of local currency funds.

Year-on-year inflation surged to 8.8 percent last month from September's 7.2 percent, spurred by the high costs of food and energy, according to the statistics office.

High consumer prices, partly caused by a weakening of local currency this year, has already forced the Bank of Uganda to raise its benchmark Central Bank Rate by 600 basis points to 17 percent in 2015.

BoU, which has previously said the effects of the shilling's weakening were yet to feed through completely to prices, is due to review its monetary policy stance again next month.

So far this year, the shilling is 22 percent weaker against the dollar.

A trader at one of the leading commercial banks said demand for dollars from importers was also subdued, with most citing weak consumer spending, hurt by high lending rates.

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