Uganda's central bank cut its central bank rate (CBR) by 100 basis points to 11.0 percent to stimulate domestic demand while the outlook for inflation improves and the forecast is cut.
It is the Bank of Uganda's (BOU) first rate cut since December after cuts totaling 1,100 basis points in 2012.
Uganda's headline inflation rate in May rose slightly to an annual rate of 3.6 percent from 3.4 percent in April but core inflation eased to 5.6 percent from 5.8 percent, "an indication that inflationary pressures have remained muted," the BoU said.
The BoU now forecasts that core inflation will stabilise around the bank's 5.0 percent medium-term inflation target over the next 12 months, with the balance of risks now neutral. In April the BOU forecast core inflation of 1-2 percentage points above the target over the next few months before easing toward the target later this year.
The change in forecast is mainly due to weaker-than-expected household consumption, which is likely to dampen demand side pressures on consumer prices, and a higher-than-expected appreciation of the the exchange rate, which dampens prices of imported consumer goods.
Economic growth in the current 2012/13 fiscal year, which ends June 30, is now forecast to be higher than in 2011/12, driven by a recovery in demand for exports and investments.
The BOU said that in 2013/14 it was unlikely that net export demand would continue to provide the primary source of growth so domestic demand will have to contribute more and household consumption will have to rebound. Investment is also expected to rise, driven by both the public and private sectors.
Last month the BOU projected Gross Domestic Product growth of 5.3 percent in 2012/13 and 6-7 percent in 2013/14.
Private sector credit demand remains constrained by high bank lending rates and structural factors and the BOU said strong credit growth will be important in boosting demand, saying its rate cut should "also be a signal for commercial banks to reduce their lending rates further in order to boost demand for bank credit."
The BOU said it would maintain its band around the central bank rate at plus/minus 2 percentage points and the margin on the rediscount rate at 3 percentage points.
In 2011 the BOU raised rates to a high of 23.0 percent in response to a rise in inflation to an all-time high of 30.5 percent in October 2011. Inflation then started to drop and hit a two-year low of 3.5 percent in February this year as the central bank slashed rates last year.