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Uganda's headline inflation rate slumped to 21.2 percent in March from a revised 25.7 percent in February while the economy contracted in the final quarter of 2011, data showed on Friday.
The Uganda Bureau of Statistics (UBOS) statistics body's revision to its headline February inflation number, as well as a revised January number of 25.6 percent, showed inflation had actually risen marginally before dropping in March.
UBOS told a news conference the core rate of inflation, which excludes food crops, fuel, electricity and metred water, came in at 23.6 percent from a revised 26.7 percent in February.
The statistics office also said the economy contracted 2.3 percent in the final three months of 2011 from the previous quarter and shrank 1.1 percent from the same period a year earlier, with construction especially hard hit.
Analysts said while the inflation and gross domestic product data could persuade the central bank to cut its key lending rate for a third month in a row, it would be wary of any potential negative impact on the local currency.
"In the months ahead, we expect to see further improvement, with Ugandan CPI still on course to reach single digits by the year-end," Razia Khan, head of Africa research at Standard Chartered Bank, said.
The central bank ramped up its key lending rate to 23 percent last year after inflation soared on the back of high food and fuel prices.
The Bank of Uganda then cut one percentage point off its Central Bank Rate in both February and March, but the second reduction sent the shilling tumbling more than 8 percent against the dollar on concerns the easing was premature.
"Given high oil prices, and its current balance of payments position, Uganda can ill afford to take any risks with FX volatility. The case for interest rate easing is clear-cut, but much will depend on FX market reaction," Khan said.
UBOS said the core rate of inflation, which excludes food crops, fuel, electricity and metred water, came in at 23.6 percent in March from a revised 26.7 percent in February.
The inflation breakdown showed food prices rose 1.2 percent in March from February, while clothing and footwear fell 1 percent during the month.
On a year-on-year basis, food inflation slowed to 15.4 percent in March from 27.6 percent in February.
Non-food price inflation declined to 23.8 percent in March from 24.3 percent in February.
The statistics body also said Uganda's economy had contracted 2.3 percent quarter-on-quarter on a seasonally adjusted basis in the three months of 2011. Gross domestic product rose by 2.3 percent in the previous quarter.
Year-on-year, gross domestic product fell 1.1 percent after a 4.8 percent rise in the third quarter of 2011, with the industrial sector shrinking 15 percent.
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