(Adds analysts' comments)
* CBank has lopped 11 pct points off rate this year
* Says it wants to give a jolt to sluggish growth
* Traders say cut risks sapping confidence in shilling
* Aid freezes could cut growth by 0.7 pct -Governor
(Adds analysts, background)
KAMPALA, Dec 4 (Reuters) - Uganda's central bank trimmed its
key lending rate for December On Tuesday, a move
that surprised some traders who said the cut might reignite
pressure on the local currency.
Currency and fixed income traders in the Ugandan capital had
broadly expected the central Bank of Uganda (BoU) to leave its
key rate unchanged after inflation rose in November
for the first time in eight months.
Instead, the central bank cut the rate by 50 basis points to
12 percent citing sluggish economic growth. The bank has now
lopped off a total of 11 percentage points this year after
jacking up interest rates in the second half of 2011 to rein in
runaway inflation and support an ailing currency.
In a briefing note, Citi described the policy statement as
"more dovish" than the last and which "leaves room for further
policy easing."
The Ugandan shilling shed 0.4 percent after the rate
decision, with commercial banks quoting the shilling at
2,685/2,695 per dollar at 1300 GMT from 2,675/2,685 just before
the cut.
"There are emerging fears the surprise rate decision will
depress interest rates on debt and spur capital flight," said
Rodgers Lutaaya, chief dealer at Bank of Africa.
"And if those fears materializes then certainly the shilling
will take a hit and could slide past 2,700 again."
Faisal Bukenya, head of market making at Barclays Bank
Uganda, said the cut, although small, risked sapping confidence
in the shilling which is down 7.8 percent against the U.S.
currency this year.
"We'll possibly see BoU increase the size of its debt
auctions as it tries to tighten liquidity and limit harm for the
shilling," Bukenya said.
But with yields expected to fall in line with the rate cut
invertors would be less likely to buy into Uganda's debt market
while existing foreign holders of Ugandan paper would be less
likely to roll over maturing debt, instead exiting the market
and exchanging shillings for dollars, Bukenya said.
AID CUTS THREATEN GROWTH
The central bank has been easing its monetary policy stance
since early this year, saying it was keen to spur a recovery in
consumer spending and a return of the country to its growth
potential.
However, the bank's Governor Emmanuel Tumusiime-Mutebile
warned the economy would suffer further if donors, who fund up
to a quarter of the annual national budget, withhold aid over a
corruption scandal.
The European Union (EU) became the latest donor to suspend
aid to Uganda alleging the embezzlement of $13 million in aid
funds by officials in the Prime Minister's office.
"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.
The central bank says Uganda's projected growth rate of
about 4.3 percent for the 2012/13 (July-June) fiscal year is
below the country's potential growth rate of around 7 percent -
what it calls a negative output gap.
"...the negative output gap is expected to persist through
2012/13," 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,"
he said.
The governor said the latest rate cut would not jeopardise
the bank's medium term inflation target of 5 percent. Ugandan
headline inflation rose to 4.9 percent year-on-year
in November from 4.5 percent a month earlier.
Yields on Uganda's debt instruments had been edging up in
the past few weeks after declining for much of the year in line
with the bank's monetary policy easing cycle.
Rates on both the 182- and 364-day Treasury bills have risen
by 3 percentage points since mid October while the benchmark
91-day paper has steadied at around 9.8 percent.
(Editing by Richard Lough; editing by Ron Askew)