Uganda's central bank cut its Central Bank Rate (CBR) by 50 basis points to 11.0 percent and said it may need to adjust the degree of monetary accommodation further "to ensure that the risks arising from both the global and domestic economy do not undermine the outlook for domestic inflation and growth prospects."
The Bank of Uganda (BOU), which last cut its rate in December 2013, said the slight rate cut was in response to risks that were tilted towards lower inflation and sluggish economic growth, but the current accommodative policy stance should support demand and help growth strengthen.
Economists had not expected the BOU to cut rates despite a drop in May headline inflation to 5.4 percent from 6.7 percent in April and a decline in core inflation to 3.3 percent, mainly due to a fall in food inflation from improved supply and an appreciation of the shilling's exchange rate.
The BOU said it had changed its inflation forecast only marginally, with core inflation forecast in a range of 5.0 to 6.0 percent in the 2014/15 financial year, which begins on July 1.
Headline inflation is forecast to be in a range of 6-7 percent, with the outlook tied to the opposing forces of spare capacity in the economy that will allow for stronger growth without pressure on input costs along as opposed to the impact on prices from a possible depreciation of the exchange rate, BOU said.
In April the central bank forecast core inflation of 5.5 to 6.5 percent over the next 12 months and then in May it said core inflation was expected to remain within the central bank's target of 5.0 percent, plus/minus 2 percentage points.
Uganda's economy remains robust and the BOU said credit growth for the private sector had picked up and is expected to rise the rest of this year and over the next two years, supporting private sector demand.
The central bank expects economic activity to pick up gradually, but it is likely that it would take some time before the economy returns to its historical growth trajectory of 7 percent. But growth will be supported by public spending on infrastructure, stronger private sector investment and firmer conditions in advanced economies.
Uganda's economy is forecast to expand by about 5.7 percent in the current 2013/14 fiscal year and the BOU said it still expects growth in Gross Domestic Product of around 6 percent in 2014/15, up from 5.8 percent in fiscal 2012/13.
Downside risks to growth, however, include a continued weak performance of the agricultural sector and political instability in some of Uganda's major trading partners.
Uganda's shilling appreciated by 6.2 percent against the U.S. dollar in 2013, but has been on a firming trend since late February this year. Today it was quoted at 2,565 to the U.S. dollar, up 1.6 percent since the start of the year.