Uganda's central bank maintained its Central Bank Rate (CBR) at a neutral 12 percent but warned that it would raise the rate if there are signs that core inflation is starting to accelerate.
The Bank of Uganda (BOU), which raised its rate by 100 basis points last month to discourage higher food prices from spilling over to overall inflation, said its "policy priority is to ensure that annual core inflation is brought back down to 5 percent over the medium term."
"As such, if there is any increase in the medium term forecast for core inflation in the months ahead, the BoU will raise the CBR," the bank said.
Uganda's headline inflation rate rose to 8.0 percent in September from 7.3 percent in August and annual core inflation rose to 6.9 percent from 6.6 percent due to higher food crop prices from drought.
Economic growth in Uganda has also picked up with the statistics office revising upwards its estimate of growth for financial 2012/13, which ended June 30, to 5.8 percent from 5.1 percent, and banks' lending to the private sector recovering.
"Given these indicators of stronger economic activity, the 6.0 percent economic growth projection for 2013/13 can be achieved," the bank said.
BOU expects the rise in food prices to be temporary with prices falling by the end of this year or early next year so inflation should also start to fall back in the first half of next year.
The BOU said its rate rise last month should help limit the pass-through of food prices to non-food prices and annual core inflation is forecast to range from 7 to 8 percent over the next 12 months before gradually declining to the 5 percent target in subsequent months.
"Nevertheless there are upward risks to the inflation forecast, which could arise from stronger than anticipated domestic demand growth in the current fiscal year or a weaker balance of payments," he said.
The BOU's rate hike last month reversed a 100 basis point rate cut in June aimed at stimulating demand.