Uganda's central bank maintained its Central Bank Rate (CBR) at 11.0 percent, saying core inflation will gradually rise to 4-6 percent over the next 12 months due to the strength of economic activity and the sharp depreciation of the exchange rate of the shilling in January that will raise prices of domestic goods.
But inflationary pressures will also be dampened by lower global oil prices and domestic food prices to the extent that they persist during the rest of the year, the Bank of Uganda (BOU) added.
Uganda's headline inflation rate eased to 1.3 percent in January from 1.8 percent in December due to lower global inflation, crude oil prices and a good domestic harvest.
Meanwhile, core inflation was unchanged from November to December at 2.7 percent. BOU targets core inflation of 5.0 percent.
BOU, which cut its rate by 50 basis points in 2014, added that data pointed to a pick-up in economic activity during the second half of 2014, supporting its forecast of 5-6 percent growth in the 2014/15 financial year, in line with the economy's estimated potential growth rate.
Growth in 2014/15, which ends June 30, is being supported by higher public investment and a recovery of credit growth that is boosting private investment and consumption.
The main risks to the BOU's outlook include a widening trade deficit, the possibility that investments in the oil sector will be delayed given the fall in oil prices, possible volatility in global financial markets and a pick-up in domestic demand beyond what is expected.
Kenya's shilling currency has been depreciating since October 2013 and fell sharply in the first few weeks of January until Jan. 26 when it fell below 92 to the U.S. dollar.
Since then it has rebounded, quoted at 91.5 today, down only 1 percent this year but down 5.5 percent since the start of 2014.
On Jan. 12 a central bank spokeswoman said the BOU would intervene to restore stability in the shilling's exchange rate, using tools like intervention or monetary policy tightening.