The Bank of Uganda, which cut its rate by 50 basis points in December, said it still assesses the risk to the inflation outlook to the upside despite better-than-expected inflation in the last few months.
"Monetary policy therefore has to balance current modest inflation outturn against the likelihood that inflationary pressures will rise over the medium term," the bank said.
Uganda's inflation rate eased to 6.8 percent in November from 8.1 percent and the bank said headline inflation eased further to 6.7 percent in December, reflecting mainly the decrease in transport and communication, beverages and tobacco prices.
Annual core inflation fell to 5.7 percent in December from 7.0 percent in November.
The bank forecasts inflation will edge further down in the near term, but rise to 6.5-7.5 percent in the latter part of 2014, with the rise depending on the exchange rate, changes in commodity prices and the degree to which economic activity spills over into cost and price pressures.
Economic growth in the first quarter of Uganda's 2013/14 financial year, which began on July 1, was lower than the central bank expected, with Gross Domestic Product shrinking by 0.6 percent from the previous quarter due to impact of drought, which led to a 3.4 percent drop in farm output.
Bu the central bank still expects the economy to strengthen in the rest of 2013/14, driven by a rebound in agriculture and public investment in infrastructure, and still expects growth in the full 2013/14 year of 6.0-6.5 percent.