Uganda's central bank Wednesday cut its benchmark lending rate by 50 basis points to 11.5 per cent amidst a long dry spell that has hit the economic growth outlook.
The Bank of Uganda Governor, Emmanuel Tumusiime-Mutebile said as a result of the prolonged drought the regulator has had to revise its growth estimates downwards to 4.5 per cent from a previous forecast of 5 per cent for the 2016/17 fiscal year.
"While the slowdown is due to temporary factors, economic growth could remain weak in the remaining part of financial year 2016/17, reflecting a combination of domestic and external factors," Prof Mutebile told a news conference in Kampala on Wednesday.
"The Bank of Uganda judges that a further cautious easing of monetary policy is warranted to support economic activity" Prof Mutebile said adding that "the easing will also be consistent with achieving the annual core inflation target of 5 per cent over the short-term."
Uganda's inflation rose to 5.9 per cent in January from 5.7 per cent in the previous month, on the back of rising food and fuel prices.
Poor weather conditions have led to food shortages in many parts of the country, driving food prices up.
BoU interest rate cut is the sixth in a row since April last year when it had reached a peak of 17 per cent. The bank expects the reduction will stimulating increased lending by financial institutions to the private sector.
"The fact that we continue to ease the policy rate is because we see private sector credit pick up from a position where it had contracted," said Dr Adam Mugume, BoU's executive director of research.
The Bank said it is optimistic that the economy will grow to 5.5 per cent in the 2017/18 fiscal year, "driven by improved public infrastructure investment, a recovery in private sector investment and improvements in agricultural production and consumption."