Uganda's central bank cut its benchmark policy rate by one per cent to 16 per cent last week in an attempt to reverse the stagnation of the economy experienced over the past years.

The decision follows six months of a stable Central Bank Rate set at 17 per cent in October 2015 in response to severe shilling depreciation.

The Uganda shilling lost roughly 17 per cent against the US dollar last year, driving up the prices of various imported items including fuel with spillover effects on the rest of the economy.

Though tight monetary actions in 2015 apparently tamed inflation pressures connected to the election cycle and partly boosted the exchange rate between October and December, sharp increases in prime lending rates have stifled demand for credit and crippled economic activity in various sectors.

For example, average lending rates charged on shilling loans increased from 24.6 per cent in January to 25.2 per cent in February according to Bank of Uganda data.

Subsequently, growth in private sector credit fell to 4.3 per cent in February compared with 4.7 per cent in January. Growth in shilling loans similarly dropped from 10.7 per cent to 8.9 per cent during the same period. Steep lending rates deeply affected agriculture, construction and manufacturing sectors personal loans, BoU research shows.

A slowdown in economic activity was felt during the second half of last year, with growth amounting to one per cent between October and December 2015 compared with 0.8 per cent in the previous quarter as consumer demand dwindled across many sectors.

Inflation declined steadily in the first quarter of this year, highlighting gains realised from tight monetary actions pursued since June 2015. Headline inflation, for instance, fell from 7.4 per cent in January to 7.0 per cent in February.

It dropped further to 6.2 per cent last month.  Food crops inflation similarly fell from 12.4 per cent in January to 7.1 per cent in February declining to 0.8 per cent last month, amidst stable supplies in major food markets.