Uganda's central bank trimmed its benchmark lending rate to 15 percent from 16 percent on Monday, saying inflation was expected to fall in the near term and signalling further cuts.
Bank of Uganda Governor Emmanuel Tumusiime-Mutebile told a news conference that annual and core inflation were expected to stabilise around the bank's 5 percent target by early 2017, though there were also concerns that price pressures could increase.
Overall inflation rose to 5.4 percent year-on-year in May from 5.1 percent a month earlier, while core inflation -- which excludes food, fuel, electricity and metered water -- increased to 7 percent from 6.4 percent. uganda
The central Bank of Uganda uses the core reading as its monetary policy yardstick.
"Demand pressures on inflation remain subdued, and indications are that domestic demand is likely to remain constrained at least in the remaining part of 2016," Tumusiime-Mutebile said.
"Given that inflation is forecast to fall back to the policy target of 5 percent over the next 12 months, BOU believes that there's scope to continue easing monetary policy."
In April the central bank unexpectedly cut rates to 16 percent from 17 percent, saying it needed to boost growth after an improvement in the inflation outlook.
Tumusiime-Mutebile said there were, however, also risks inflation would rise in coming months due to rising food prices plus international oil prices and fuel tax increases.
The governor said the economy was expected to grow by 4.6 percent in the 2015/16 fiscal year that ends this month, down from an earlier forecast of 5 percent.
He attributed the downward revision to a weak external economic environment, soft commodity prices, tight financial conditions and subdued domestic demand.