Government cuts interest rates again as inflationary pressures ease

Uganda's central bank cut its key lending rate by another 100 basis points on Monday to shore up the economy as its governor said foreign exchange stability had dampened inflationary pressures.

The Bank of Uganda lowered its main lending rate to 14 percent, its third rate cut since April, and after the Ugandan economy shrunk in January to March, after growing in the previous quarter, as agricultural output fell.

Governor Emmanuel Tumusiime-Mutebile said the bank expected the economy to improve, forecasting economic growth would accelerate to 5.5 percent in the fiscal year ending June 2017, from a forecast 4.6 percent in 2015/16.

Both annual headline and core inflation were likely to drop to around 5 percent by the end of 2016, he said.

"Given that inflation is forecast to stabilise around the policy target ... over the next six months, the Bank of Uganda believes that a continued easing of monetary policy is warranted. This will also help to support a recovery of private sector credit and hence support real economic growth," he said.

"The recovery in private sector credit growth and higher public infrastructure spending are expected to support economic growth," he added.

At its last Monetary Policy Committee meeting in June the central bank cut its main rate to 15 percent from 16 percent. The bank, which holds policy meetings every two months, began cutting rates at its meeting in April.

Year-on-year headline inflation fell to 5.1 percent in July, from 5.9 percent the previous month, helped by slowing fuel prices.

Core inflation, which strips out food, fuel and metered water, also dropped to 5.7 percent during the month from a revised 6.8 percent in the previous month.

The central Bank of Uganda uses the core reading as its monetary policy yardstick.