Ugandan shilling strengthens, inflation spike boosts rate rise expectations

By Elias Biryabarema KAMPALA (Reuters) - The Ugandan shilling strengthened slightly on Monday, helped by end-month inflows from charities, and traders said it could be set for more gains as a spike in inflation made an interest rate rise more likely. At 1135 GMT commercial banks quoted the Ugandan currency at 2,560/2,570 to the dollar, a touch stronger than Friday's close of 2,565/2,675. Headline inflation in the east African country rose to an annual 8 percent in September, from 7.3 percent in August, fuelled by high food prices, central bank data showed on Monday. Core inflation, which excludes food crops, fuel, electricity and metered water, rose to 6.9 percent this month from 6.6 percent last month and was significantly higher than Bank of Uganda's (BoU) medium-term target of 5 percent. The jump in prices raised the possibility that the central bank could raise its policy rate again when it meets on Wednesday. It lifted its benchmark rate by 100 basis points to 12 percent this month, saying it needed to prevent high food costs from filtering through and triggering a rise in non-food prices. "I think at 12 percent the central bank rate is already high, however BoU will certainly be troubled by the persistent upward price trend," said Ahmed Kalule, a trader at Bank of Africa. "The common sentiment is that it's very likely they will hike the rate and that will keep the shilling on the bullish side." Market players say further monetary tightening could weaken already soft consumer spending, blunt importer dollar demand and boost the local currency. "There's some marginal possibility we might get a no-change on the rate," said a trader at a leading commercial bank. "But the inflation print clearly calls for some upward adjustment ... we'll largely see market momentum weighing more in favour of the shilling."