Uganda c.bank cuts key lending rate to 17 pct

KAMPALA (Reuters) - Uganda's central bank cut its benchmark lending rate on Thursday for the third consecutive month to 17 percent from 19 percent, saying it was necessary to stimulate economic recovery through lower commercial bank lending rates.

The Bank of Uganda said it saw core inflation at 7 percent by the end of the year and forecast a further fall to 5 percent in the first half of 2013.

Bank Governor Emmanuel Tumusiime-Mutebile said food prices have fallen in the last two months because of a good harvest.

Shilling-denominated loans to the private sector were stagnant during the 2011/12 fiscal year, mainly because of their high cost, he told reporters, but demand was more buoyant for foreign currency loans carrying lower interest rates.

Although there was a modest recovery in real economic activity in the third quarter of 2011/12, real output remained below the economy's potential level because of subdued domestic demand and a deteriorating global economic outlook, he added.

"To ensure that real GDP (gross domestic product) growth of at least 5 percent can be achieved in 2012/13, it will be necessary to strengthen domestic demand, especially by stimulating a recovery of commercial bank lending to the private sector," Tumusiime-Mutebile said.

Uganda has forecast its economy will grow by 5.4 percent in the 2012/13 (July-June) fiscal year.

A rate cut had been on the cards after year-on-year inflation fell for the fifth straight month to 14.3 percent in July from 18.0 percent in June, thanks to a drop in food prices.

"We expect the BoU to cut the central bank rate more aggressively in coming months as both the headline and core inflation measures drop into single digits in September," said Mark Bohlund, senior economist at IHS Global Insight in London.

"We see a high likelihood that the core inflation rate will trend below the BoU's 5 percent medium-term target in the fourth quarter, giving the central bank more leeway to support economic growth."

The Ugandan shilling showed little response to the rate decision, with commercial banks quoting it at 2,485/95 to the dollar both before and after the central bank announcement.

Fixed income and money market traders had been expecting a cut in the rate after July inflation fell, and have been bearish on the shilling as government debt yields are forecast to fall, which could deter foreign investors.

"Most people had anticipated that there will be a cut. That's why the shilling has not reacted immediately. But this is a sign that rates will come down and put the shilling under pressure as yields come down," said Robert Aloo, a trader at the Kenya Commercial Bank in Kampala.

"The shilling has been fairly stable for a while, but we could see it weakening to above 2,500 to the dollars in the short term."

Source: http://news.yahoo.com/uganda-cbank-cuts-key-lending-rate-17-pct-093607021--business.html

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