(Adds analyst comment, details)
By Elias Biryabarema
KAMPALA, Oct 3 (Reuters) - Uganda’s central bank lowered its key lending rate to 9.5 percent on Tuesday, saying the cut by 50 basis points would accelerate the flow of credit to the private sector and so boost economic growth.
It was the first time borrowing costs have been cut to less than 10 percent since Uganda made inflation-targeting the focus of monetary policy in 2011.
Bank of Uganda Governor Emmanuel Tumusiime-Mutebile said core inflation was seen on target at 5 percent in the medium term but that a poor food harvest due to pests and poor rains risked pushing up prices.
Amid a benign inflation outlook and tepid growth, Tumusiime-Mutebile said a “cautious easing of monetary policy is warranted to boost private sector credit growth and to strengthen the economic growth momentum”.
He said the east African economy was being supported by the central bank’s accommodative monetary policy, better management of public investments and an improving global economy.
Monetary policy makers in Uganda pursued a policy easing cycle for more than a year, cutting the benchmark rate from a high of 17 percent in April last year to 10 percent in June to try to reinvigorate consumer demand.
The rate was then held at the last monetary policy committee meeting in August.
The governor said the economy would expand at between 5 to 5.5 percent in fiscal year 2017/18, which started in July, which was “a bit lower than the estimates of potential GDP growth”.
Growth is seen accelerating to between 6 and 6.5 percent over the medium term, he added.
Uganda’s overall inflation rate edged up to 5.3 percent last month from 5.2 percent in August. Razia Khan, chief economist for Africa at Standard Chartered Bank, said in a note that the move below the 10 percent big figure was “significant.”
Nevertheless “there is still a need to do more to boost private sector credit growth, and help the economic recovery”, she added.
Further rate cuts were unlikely, Khan said, because Uganda would need a “structural improvement in fiscal policy to be able to reduce rates to much lower levels”.
Writing by Clement Uwiringiyimana; Editing by Catherine Evans