UPDATE 2-Uganda slashes key lending rate, shilling weaker vs dlr

(Recasts, adds analyst comments and shilling reaction)

* Central bank says inflation to stay around 5pct until mid-2013

* Analysts expect BoU's monetary policy easing cycle nearing end

* Shilling inches lower after 200 basis points cut By Elias Biryabarema

KAMPALA, Oct 2 (Reuters) - Uganda's central bank slashed its key lending rate for the fifth straight month on Tuesday to 13.0 percent from 15.0 percent, but the bank's governor said further cuts were likely to be small after a dramatic fall in inflation.

The Ugandan shilling weakened slightly after the decision, following significant pressure on the currency in recent days on fears that the expected rate cut would spark a mass outflow of offshore investors from Uganda's debt market.

Bank of Uganda (BoU) was likely nearing the end of its monetary policy easing cycle, analysts said, as inflation in east Africa's third biggest economy fell to 5.4 percent in September from above 30 percent in October 2011.

"Further rate cuts will be dependent on to what extent economic growth recovers in FY2012/13 following a disappointing performance in FY2011/12," said Mark Bohlund, senior economist for Sub Saharan Africa at IHS Global Insight.

Central Bank Governor Emmanuel Tumusiime-Mutebile said any further cuts to the key lending rate in 2012 were likely to be small unless there was a major drop in inflation and aggregate demand, but this was unlikely in the short term.

"The sharp drop in the annual inflation rates of 6-7 percent points that occurred in September will not be repeated in the near term, because it was mainly caused by the so-called base effects," he said.

Annual core inflation was expected to stabilise at around 5 percent in the last quarter of 2012 and to remain at approximately that level in the first half of 2013, the governor said.

However, he warned there were upside risks to the inflation outlook, mainly from domestic supply shocks, particularly low food production, higher global commodity prices and exchange rate depreciation.

A drop in food costs helped Uganda's year-on-year inflation last month to plummet to 5.4 percent from 11.9 in August.

Yields on Uganda's benchmark 91-day paper have declined significantly since the start of the year, falling from around 23 percent in January to 10 percent in September, eroding offshore investor interest in Uganda's debt and occasionally spurring pressure on the shilling.

Analysts, though, said the shilling was unlikely to take a hard knock in the coming days because the market had already priced the rate cut into the shilling's value.

At 1139 GMT commercial banks quoted it 2,560/2,570, slightly weaker than Monday's close of 2,555/2,565.

"I see the exchange rate maintaining current levels because expectations of a rate cut had already been captured," said Nicholas Mutatira, trader at Ecobank.

"They (banks) have already factored it in to reflect the currency level, that is why we have been seeing quite some depreciation (shilling) in the last say seven days."

Faisal Bukenya, head of market making at Barclays Bank, said a Treasury bill auction worth 95 billion shillings ($37.11 million)on Wednesday should indicate the currency's trading direction in the coming weeks. ($1 = 2560.0000 Ugandan shillings)

(Additional reporting by Drazen Jorgic and Beatrice Gachenge; Editing by Stephen Nisbet)

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Keywords: UGANDA CBR/