Bank of Uganda's Tumusiime-Mutebile.

The Bank of Uganda has unexpectedly raised its key lending rate-the central bank rate (CBR) to 10 percent in October, a one percentage point from August’s 9.0 percent, on account of rising inflation and the need to maintain the country’s economic growth.

“Inflation is on an upward trajectory and core inflation is projected to rise above the target of 5 percent within the next 12 months,” Bank of Uganda (BoU) Governor Prof. Emmanuel Tumusiime-Mutebile said while reading the monetary policy statement in Kampala on Wednesday.

Tumusiime-Mutebile said that in recent months, rapidly rising oil prices coupled with a weaker shilling exchange rate and indirect tax increases have pushed up inflation.

He said that easing domestic financial conditions and strong domestic demand would maintain a healthy growth momentum.

“The strong rebound in economic growth in financial year 2017/18 has closed the negative output gap, and with growth projected to remain robust in FY2018/19, core inflation could rise higher in the remaining part of the fiscal year,” he said.

Meanwhile, Core inflation, which is the BoU’s monetary policy target, rose from 0.8 percent in June to 3.9 percent in last month.

He attributed the increase in Core inflation partly due to higher services prices, which rose sharply at the beginning of the new financial year reflecting the effect of the Over-The- Top (OTT) tax. “Services inflation rose 1.7 percent in June 2018 to 5.3 percent in August 2018 before slightly easing to 4.5 percent in September 2018,” he said.

The Governor warned that higher prices and the strong domestic demand could push services inflation higher in the remaining part of the year.