Bank of Uganda mop-up hikes loan charges

Wednesday, 24th August, 2011

AN aggressive cash mop-up by the Central Uganda since the beginning of the year has had little effect on inflation so far, but has pushed up lending rates across the board.

In trying to contain inflation, the Bank of Uganda (BoU) often resorts to selling treasury bills and bonds to suck money out of circulation.

Inflation occurs when prices increase as result of too much money chasing too few goods. The higher the inflation pressure, the more likely the Central Bank will push up its paper sales.

“The whole issue is tightening money supply to fight inflation,” an official familiar with the operations said.

Since the beginning of the year, the bank has stepped up its bond programme, selling sh530b in treasury bonds in the past seven months of the year compared to sh600b the whole of last year.

In addition, the Central Bank has pushed up its bi-monthly treasury bill auctions to about sh95b compared to a maximum of sh85b at the same time last year.

The current 91-day bill rate is 15.88%, the highest since July 2004 when it averaged 19.08%. As a result, bond yields have jumped to record highs. Last week’s two-year bond yield jumped to 15.77%.

As a direct consequence, commercial banks have been raising their base lending rates to above the 20% mark for the first time in more than a year.

Inflation, however, has stayed stubbornly high, topping out at 18.7% in July, the highest in more than two years.

The rising inflation, financial experts believe, is a fallout from the huge campaign spending during the presidential and parliamentary polls in February.

By Paul Busharizi : The New Vision Newspaper