Uganda holds rate as inflation is set to drop towards target

    Uganda's central bank maintained its Central Bank Rate (CBR) at the neutral level of 12.0 percent given that core inflation is projected to decline to the bank's 5.0 percent target and that real economic growth is now close to the economy's long-term potential growth of 6-7 percent.
    The Bank of Uganda (BOU), which raised its rate by 100 basis points in September and warned in October that it would raise rates again if core inflation accelerates, said the balance of upside and downside risks to inflation were now roughly even.
    The BOU forecasts annual core inflation to remain in a range of 6.5-7.5 percent over the next 12 months and then decline towards 5.0 percent in 2015. Last month the BOU forecast 7-8 percent core inflation over the next year but also saw inflation easing towards its target.
    Uganda's headline inflation rate eased to 8.1 percent in October from 8.4 percent while the core inflation rate declined to 7.2 percent from 7.4 percent as monthly food crop prices declined by 1.0 percent after two months of steep rises.
    The central bank said the inflation outlook was still subject to a degree of uncertainty and while food prices may have peaked, it was too early to be definitive. Buoyant domestic demand may also limit the decline in core inflation over the medium term.

    Uganda's economy has improved this year with growth in the second calendar quarter rising by 2.1 percent from the first quarter for annual growth of 5.7 percent, up from 5.4 percent.
    The central bank said data for the first quarter of the current 2013/14 financial year, which began on July 1, "indicates a buoyant level of economic activity which if maintained would be consistent with growth of 6 percent or above for the 2013/14 fiscal year."
    Last month Uganda's statistics office revised upwards its estimate for growth in financial 2012/13 to 5.8 percent from an earlier estimate of 5.1 percent and the bank also predicted growth of 6.0 percent for the current financial year.
    The BOU's rate rise in September was aimed at limiting the pass-through of higher food prices to non-food prices. The rate rise reversed a 100 basis point rate cut in June that was aimed at stimulating demand.

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