UPDATE 2-Sharp fall in Ugandan inflation takes pressure off central bank to raise rates

Elias Biryabarema
Friday, 29 Nov 2013 | 7:57 AM ET

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* Headline inflation falls to 6.8 pct from 8.1 pct

* Consumer prices fall 0.7 pct in Nov m/m

* Food prices dip on better supply

* Central bank expected to keep rates unchanged next week

(Adds analyst, details)

KAMPALA, Nov 29 (Reuters) - Uganda's annual inflation rate fell sharply to 6.8 percent in November, data showed on Friday, taking pressure off the central bank to raise interest rates when it meets next week.

Inflation, while still volatile, has come down from an 18-year high of 30.5 percent reached in 2011 and the easing trend suggests the economy can maintain fast growth without overheating.

The central bank forecasts east Africa's third-largest economy is likely to grow by 6 percent in the financial year ending in June 2014, compared with a 5.8 percent expansion in the previous 12 months.

Headline inflation fell this month from 8.1 percent in October.

The decline was due to a drop in food costs, which fell 2.3 percent during the month as prices of sweet bananas, cabbages, tomatoes, oranges and other fruit and vegetables decreased as more supply reached the market, the statistics office said. Food carries a 27.2 percent weighting in the consumer price index.

The data raised expectations that the central bank, which has maintained a neutral policy stance in the last two months will leave its benchmark rate unchanged at 12 percent at its policy meeting next week.

It last moved in September, raising the key rate by 100 basis points in one go following a spike in inflation.

Uganda, Africa's biggest coffee exporter, has seen relatively strong growth over the last decade, helped by stable economic policies, huge foreign direct investment inflows and rapid expansion of the private sector.

The central bank said this month that economic growth was now close to its long-term potential and that warranted a neutral monetary policy stance as inflation risks were balanced on the upside and downside.

Core inflation, which excludes both food and fuel costs, fell to 7.0 percent this month from 7.2 percent in October, Friday's data showed.

"This will likely make the Bank of Uganda (BoU) feel more at ease with keeping the Central Bank Rate on hold," said Mark Bohlund at IHS Global Insight.

The central bank said last month that it expected core inflation to stay at 6.5-7.5 percent in the next 12 months before falling towards the bank's medium-term target of 5 percent in 2015.

Bohlund said the drop in both headline and core inflation would put downward pressure on both commercial banks' lending rates and the Ugandan shilling.

Tight monetary policy has kept the shilling on an even keel this year. It has traded mostly in the 2,500-2,600 range versus the dollar and is seen maintaining the range for the rest of 2013.

The shilling barely moved in reaction to the inflation data on Friday.

Food inflation on an annual basis eased to 8.1 percent in November from 10.9 percent during the year through October, the statistics office said in a statement.

(Reporting by Elias Biryabarema; Writing by George Obulutsa; Editing by James Macharia and Susan Fenton)