August 14, 2014 / 10:47 AM / 3 years ago

UPDATE 1-Uganda holds key interest rate, says inflation on target

* Key lending rate stays at 11 pct

* Central bank says economy on track to grow 6 pct

* Inflation within target, private sector credit growing (Adds governor’s and analyst’s quotes, details)

KAMPALA, Aug 14 (Reuters) - Uganda’s central bank kept its main lending rate at 11 percent on Thursday, saying inflation was within its target and the economy was on track to grow 6 percent this fiscal year.

The Bank of Uganda (BoU) cut its benchmark rate to 11 percent in June as Governor Emmanuel Tumusiime-Mutebile voiced concerns that downside risks, from the global and domestic economy, meant Uganda would not be able to return to economic growth of around 7 percent achieved in previous years.

Headline annual inflation dropped to 4.3 percent in July from a revised 5.0 percent in June, giving policymakers room to ease rates further.

But Tumusiime-Mutebile said after a policy meeting on Thursday that the bank had decided to keep monetary policy on hold because interest rates on commercial loans had eased, and private sector credit was growing, so policy was “appropriately configured to foster sustainable growth”.

The bank maintained its economic growth forecast of 6 percent for the fiscal year 2014/2015 starting July 1, driven by heavy public investment and compared to a projected 6-6.5 percent expansion in 2013/14. The growth figure for 2013/14 has not been released yet.

“The BoU macroeconomic forecasts remain unchanged ... core inflation is forecast to remain in the range of 4-5 percent in the third quarter of 2014, increasing to 5.5-6.5 percent over the next 12 months,” Tumusiime-Mutebile told a news conference.

Before cutting rates in June, the bank had held its benchmark rate at 11.50 percent for five straight months.

Razia Khan, Standard Chartered Bank’s Africa head of research, said the central bank could cut interest rates again in the coming months, but did not predict when.

“Given the recent easing by the Bank of Uganda, we should not be too surprised that they have not cut rates again - just yet. However, with the inflation outlook remaining favourable, there is still room to ease further over the coming months,” she said. (Reporting by Elias Biryabarema; Writing by James Macharia; Editing by Susan Fenton)

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