Central bank cuts key lending rate, says inflation outlook improved

Uganda's central bank cut its benchmark lending rate on Monday, saying the inflation outlook had improved and the rate needed to be lowered to keep economic growth close to its potential.

Bank of Uganda (BOU) Governor Emmanuel Tumusiime-Mutebile told a news conference the bank had dropped the rate to 16 percent from 17 percent previously, adding that real growth had dipped at the start of this year and that consumer demand remained subdued.

"Given that the inflation outlook has improved and to ensure that real economic growth remains close to potential, the BoU believes that it is warranted to cautiously ease monetary policy. The BoU will therefore reduce the CBR by 1 percentage point," he said.

Tumusiime-Mutebile said inflation prospects had improved "mainly because of the easing of the exchange rate depreciation pressures, faster decline of food prices, and the subdued global economic outlook."

The bank uses core inflation, which excludes food, metered water, fuel and electricity, to determine its monetary policy and had seen it peaking at 6-8 percent in the second quarter.

Core inflation rose to 6.9 percent in March, up from 6.8 percent in February.

Tumusiime-Mutebile said the bank forecast that both headline and core inflation would remain around 6.5 percent in the first half of 2016, before coming down to the bank's medium term target of 5 percent in the first quarter of 2017.

He said however there were "upside risks" to the inflation outlook including the future path of the exchange rate.

The shilling is up 0.1 percent against the dollar this year after weakening by close to a quarter in 2015.