KAMPALA, Jan 20 (Reuters) - Uganda's central bank expects the economy will expand by 5 percent in 2009/10, down from an earlier government estimate of 6 percent, due to weak demand but sees a rebound to 7 percent by the next fiscal year.
"The economy is slowing down, I think essentially because of the appreciation of the exchange rate ... which slowed down aggregate demand in the economy," Emmanuel Tumusiime-Mutebile told Reuters in an interview late on Tuesday.
The governor said that the central bank would continue "to lean against" an appreciation of the shilling.
"To the extent that the (depreciation) of the exchange rate does not go as far as threatening other goals of macroeconomic management ... We shall allow the exchange rate to depreciate."
Tumusiime-Mutebile also said he expected core inflation to fall below 5 percent by the end of the fiscal year from 7.4 percent in December. He saw headline inflation around 7 percent at the end of 2009/10 from 10.9 percent in December.
"The recent fall in core inflation gives the (central bank) some scope for short-term easing of monetary policy to support a recovery of aggregate demand," he said.
Asked what the central bank would do if core inflation began to increase, Tumusiime-Mutebile said: "If core inflation starts to rise, we will tighten monetary policy. Definitely." (Editing by Helen Nyambura-Mwaura & Kim Coghill)