* Overall inflation rose to 7.2 pct in May
* Growth in the fiscal year to June is seen at 3.9 pct
* Analyst says 1 pct rate cut was “shock” move (Adds economic analyst comment)
By Elias Biryabarema
KAMPALA, June 19 (Reuters) - Uganda’s central bank cut its key lending rate to 10 percent from 11 percent on Monday, saying a stable shilling currency and subdued domestic demand had helped ease core inflationary pressures.
The bank’s medium-term target for core inflation - which strips out food, fuel, metered water and electricity prices - is 5 percent. The annual rate rose to 5.1 percent in May from 4.9 percent in April.
Bank of Uganda (BoU) Governor Emmanuel Tumusiime-Mutebile said a supply side shock that caused inflation to rise in the last six months was expected to wane in the three months to September.
“With domestic inflationary pressures remaining subdued and given the continued growth prospects, the BoU judges that continued easing of monetary policy is appropriate,” he told a news conference.
“This will be consistent with achieving the core inflation target ...and will also support the recovery of real output in the economy.”
Uganda’s overall inflation rate rose to 7.2 percent last month from 6.8 percent.
The shilling was stable after the rate announcement, but was expected to ease gradually following the move.
Faisal Bukenya, Kampala-based economic analyst, said the 100 basis point cut was a “shock” move against a backdrop of rising overall inflation.
“I had anticipated 50 basis points, but when they did 100 it was a bit of a shock. The shilling will be impacted on the depreciation side, but it will be gradual,” Bukenya said.
The central bank’s rate easing cycle has now been running for more than a year, and has brought the benchmark rate down from a high of 17 percent since April last year.
Tumusiime-Mutebile said the economy expanded by 3.9 percent in the year to June, down from 4.7 percent the previous year, due to drought and the slow implementation of public investment projects.
He forecast growth would rise to 5 percent in 2017/18, supported by better implementation of public investments, higher foreign direct investments and a pick-up in private sector credit. (Writing by George Obulutsa; editing by Alexander Smith)