BoU cuts lending rate to 12 percent

Bank of Uganda has cut its key lending rate to 12 percent, saying economic growth was expected to remain sluggish this fiscal year.

BoU has now made seven consecutive monthly rate cuts in East Africa's third-largest economy as it tries to spur a recovery in consumer spending and a return of the country to its growth potential.

"With real GDP growth forecast to remain below potential, the negative output gap is expected to persist through 2012/13," Governor Emmanuel Tumusiime-Mutebile told a news conference.

"Inflation pressures are currently subdued and are likely to remain so in the near term because of the negative output gap."

The Ugandan shilling weakened slightly after the rate cut, trading at 2680/90 from 2675/85 just before the cut.

Tumusiime-Mutebile said the rate cut would boost real economic growth without jeopardising the medium-term inflation target of 5 percent.

Headline inflation in Uganda rose year-on-year for the first time in eight months in November, to 4.9 percent from 4.5 percent.

However, the governor warned that the economy could suffer if donors, who fund up to a quarter of the annual national budget, withdraw their aid in light of a corruption scandal involving officials from the Office of the Prime Minister.

"If all donors being reported to have cut their aid do cut their aid, we think that this will reduce the potential growth rate by about 0.7 percent," he said. Reuters