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Uganda shilling Stable Against US Dollar 30-April-2012

The Ugandan shilling was stable against the dollar on Monday, though traders said it may weaken ahead of an interest rate-setting meeting on Wednesday as slowing inflation could prompt the central bank to ease policy.

Data released by the Uganda Bureau of Statistics on Monday showed year-on-year headline inflation in east Africa's third largest economy declined to 20.3 percent in April, from a revised 21.1 percent.

The Bank of Uganda (BoU) is due to announce its benchmark Central Bank Rate (CBR) on May 2 and some traders said the bank may resume its easing stance after holding the rate at 21 percent for the past two months.

Commercial banks in Kampala quoted the local currency at 2,505/2,515, unchanged from Friday's close.

"Ideally, we should see a significant rate cut since inflationary pressures are continuing to ease," said David Bagambe, a trader at Diamond Trust Bank.

"But the BoU is mindful of the possible pressure on the shilling that a big rate cut might cause so we'll probably see half a percentage point cut."

The central bank cut rates in both January and February but the shilling suffered on the view that it was easing too soon as inflation was still above 25 percent at the time.

The bank cited lingering risks from high food prices and a weak currency to justify holding rates steady in March and April.

Analysts say the decision has helped the local currency to stabilise around 2,500 against the dollar this month after the February cut pushed it to 2,620 in March.

"Fears of undermining the current stability of the shilling might push BoU toward a conservative stance," said Faisal Bukenya, head of market making at Barclays Bank.

"So the bank is likely either to hold the rate again or effect some kind of symbolic cut, say 50 basis points. Otherwise the drop in prices would signal a major cut," he said.


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