Uganda's central bank held its central bank rate (CBR) steady at 11.0 percent, saying it was maintaining a neutral policy stance as core inflation over the next 12 months is forecast to remain very close to the bank's 5.0 percent target.
The Bank of Uganda (BOU), which cut its rate by 100 basis points in June, said the the risks to inflation remain on the upside, as last month, with pressures from the domestic supply side, along with the prospect of higher oil prices due to geopolitical factors in the Middle East and North Africa.
"Demand pressures remain moderate and still do not pose a risk to the inflation outlook," the bank said.
Headline and core inflation are likely to rise slightly in the next three to six months due to the impact of drought on food prices, but this is expected to be temporary and prices should then ease and stabilise around 5.0 percent.
Headline inflation rose to 5.1 percent in July from 3.6 percent and core inflation to 6.4 percent from 5.8 percent due to higher food prices, particularly prices of processed food, which is likely transitory.
Uganda's economy is forecast to expand by 6 percent in the 2013/14 financial year, which began July 1, but downside risks to growth remain, the bank said.
A decline in private sector imports in the first six months of this year and a subdued pace of credit extension "suggests a softening of aggregate demand," but a decline in lending interest rates to 22.6 percent in June from 27 percent last year should contribute to a rise in private sector investment and stronger growth in the later part of 2013/14.
Uganda's Gross Domestic Product shrank by a quarterly 0.1 percent in the first quarter of 2013, but on an annual basis, GDP rose by 7.2 percent, down from 10.4 percent in the fourth quarter.