The Bank of Uganda (BOU), which cut its rate in June by 50 basis points, said its medium-term macroeconomic forecasts were largely unchanged since August and over the next three months annual core inflation is forecast to be within a range of 2 to 4 percent before rising to around 5 percent over the next 12 months, a result that is consistent with the BOU's 5.0 percent target.
In August the bank's Monetary Policy Committee forecast core inflation of 4 to 5 percent in the third quarter of this year, rising to 5.5 to 6.5 percent over the next 12 months.
Uganda's headline inflation rate dropped to 1.4 percent in September from 2.8 percent in August, mainly due to falling food prices.
Food and food crops inflation decelerated to minus 2.8 percent and minus 1.9 percent, respectively, in September while core inflation declined to 2.0 percent "largely driven by the lagged impact of exchange rate appreciation experienced in 2013," the BOU said.
The BOU said it expects core inflation to rise over the medium term due to higher domestic demand and the impact of the depreciation of the shilling's exchange rate since February.
The shilling has been declining against the U.S. dollar since late February and was trading around 2,695 to the dollar today, down more than 6 percent this year.
"Upside risks to the medium term inflation forecast largely emanate from the possibility that domestic demand is likely to be stronger than forecast and both domestic and external factors especially global financial instability might adversely affect the exchange rate," the BOU said.
Uganda's economy is forecast to expand by about 6 percent in the current 2014/15 financial year, which began on July 1, supported by fiscal stimulus, a rebound in agricultural production, faster credit growth in the private sector and increased foreign direct investment, the BOU said.
"The risks to the growth forecast mainly emanate from supply-side factors and weaknesses in the external economic environment," the central bank added.
In the first calendar quarter, or the third quarter of financial 2013/14, Uganda's Gross Domestic Product expanded by an annual rate of 4.73 percent, up from 4.23 percent in the October-December 2013 quarter.