The central bank of Uganda again cut its central bank rate (CBR), this time by a "modest" 50 basis points to 12.5 percent, but indicated that it may soon halt its aggressive rate-cutting campaign.
The Bank of Uganda (BoU), which has cut its policy rate eight times this year for a total reduction of 1,050 basis points, said core inflation was now forecast to stabilize around the bank's 5.0 percent target over the next three quarters.
"I believe that with this reduction, the CBR is now approaching the level which is consistent with the medium-term inflation target of 5.0 percent," the bank's governor, Emmanuel Tumusiime-Mutebile, said in a statement.
Economists had expected the BoU to cut its rates following news that headline inflation fell to 4.5 percent in October from September's 5.5 percent. Core inflation eased to 4.0 percent from September's 4.9 percent.
"These reductions in inflation have re-inforced the BoU's confidence that core inflation will stabilize at around the medium-term target of 5.0 percent through the middle of next year," the bank said.
Uganda's Gross Domestic Product is forecast to increase by 5.0 percent in 2012/13, up from 3.4 percent last year, but remain below the economy's potential of 6.5-7.0 percent, the bank said.
"The main constraints to a faster recovery in the short term are the weak domestic demand and the risks and uncertainties in the global economy, it added.
Following its rate cuts, the bank said there were signs that commercial banks were starting to lend more, saying the lack of a stronger recovery was partly to due a "lethargic adjustment" in banks' lending rates, adding that it was concerned that interest rates spreads had recently increased.
Uganda's GDP contracted by an annual 0.2 percent in the second quarter after a 2.0 percent rise in the first quarter.
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