The central bank of Uganda cut its key Central Bank Rate (CBR) by a further 200 basis points to 13.0 percent to provide further stimulus to the economy following a sharp drop in inflation.
The Bank of Uganda (BOU), which has now cut its benchmark rate 7 times this year for a total reduction of 1,000 basis points, said the CBR rate was now approaching a level that was consistent with core inflation of 5 percent and any further rate cuts this year were likely to be minor.
Uganda's annual headline inflation rate fell to 5.4 percent in September from 11.9 percent in August while the annual rate for core inflation fell to 4.8 percent from 11.4 percent in August, the bank said.
The bank said the sharp drop in September inflation was due to base effects but added that inflationary pressures had been easing the entire year due to weak demand, as the economy is operating below potential output, and a stable exchange rate.
"Any further reductions in the CBR in 2012 are likely to be small, unless there is a major downward shock to inflation and aggregate demand more broadly, which seems unlikely in the short term," the bank said in a statement.
The central bank said it expects inflationary pressures to remain subdued in the short-term with the core inflation rate stabilizing around 5 percent in the last quarter of 2012 and to remain at that level in the first half of next year.
"In the short-term, monetary policy will continue to emphasize stimulating a recovery in aggregate demand in order to boost real economic growth, while safeguarding against any resurgence in inflation," the BOU said.
The central bank said previous rate cuts had not been passed fully through by commercial banks to their lending rates but it was hopeful there would be "a significant reduction in bank lending rates for all borrowers" in October.
The BOU said the band around the CBR would remain at plus/minus 3 percentage points and the margin on the Rediscount Rate would remain at 4 percentage points. The Rediscount rate will be set at 17 percent and the Bank Rate at 18 percent.