Uganda's central bank held its central bank rate (CBR) steady at 12.0 percent, saying it is maintaining a neutral policy stance as the economic recovery is gaining momentum and inflation is in line with its target.
The Bank of Uganda (BOU), which slashed interest rates in 2012, said short-term economic prospects had improved compared to its outlook and "constraints to economic growth from deficient aggregate demand are now receding."
The BOU said inflationary pressures are largely subdued but annual core inflation is still forecast to remain 1-2 percentage points above the bank's 5.0 percent target for the next few months.
"Nevertheless, we expect core inflation to fall back towards 5 percent later in 2013," the BOU said.
Uganda's headline inflation rate rose to 4.0 percent in March, slightly up from February's 3.5 percent, with the underlying, or core, inflation rate rising to 6.8 percent from 5.6 percent.
The rise in headline inflation was fueled by the first rise in food crop prices since November last year while core inflation rose due to the base effect of a drop in prices in March 2012.
Last year the BOU cut rates by 1100 basis points after raising them sharply in 2011 to a high of 23.0 percent to curtail inflation that soared to an all-time high of 30.48 percent in October 2011. Inflation then plunged over the next 12 months to 4.5 percent in October 2012.
Since then, inflation has stabilized and even declined to a two-year low of 3.5 percent in February.
"There are signs of increased buoyancy in the economy," the BOU said, adding that preliminary GDP data for the first half of 2012/13 indicate accelerating growth, driven by strong growth in services, construction and manufacturing.
Recent trends also indicate that the recovery continued in the third quarter of the current financial year that ends June 30, the BOU said.
"As such, it is possible that the negative output gap that characterised the economy in 2011/12 has narrowed significantly," the BOU said, adding that private sector credit had risen in line with overall growth although shilling-denomicated loans remain subdued.
Uganda's Gross Domestic Product expanded by 1.8 percent in the third calendar quarter from the second quarter for annual growth of 2.8 percent, down from 3.2 percent rate in the second quarter.
The central bank's statement is considerably more confident about the economic outlook than last month when it said economic growth was below potential and upside inflationary risks had risen.