* C.bank says growth slowing as currency appreciates
* C.bank to continue to lean against shilling's appreciation
* Sees yields on govt paper bottoming out in six months
* Plans to continue with repos for "foreseeable future" (Adds more quotes, background)
By Jack Kimball
KAMPALA, Jan 20 (Reuters) - Uganda's central bank expects the economy will expand by 5 percent in 2009/10, down from an earlier government estimate of 6 percent, due to weak demand but sees a rebound to 7 percent by the next fiscal year.
East Africa's third-largest economy is increasingly being eyed by foreign investors, especially in the oil sector and sovereign debt markets, after two decades of economic stability and liberal economic policies.
"The economy is slowing down, I think essentially because of the appreciation of the exchange rate ... which slowed down aggregate demand in the economy," Emmanuel Tumusiime-Mutebile told Reuters in an interview late on Tuesday.
"Growth in the services sector, which comprised almost half of total GDP, has been slow for several quarters, which reflects weaknesses in consumer demand ... the performance of food crop agriculture was very poor in the first quarter."
Since 2007, Uganda has been hit by high food and fuel prices that pushed inflation up and in late 2008, by the fallout from the global financial crisis.
Uganda's currency moved from around 1,600 per dollar before the global economic crisis to lows of about 2,300 in the first quarter of 2009, but has since rebounded to around 1,953.
The governor said that the central bank would continue "to
lean against" an appreciation of the shilling
"To the extent that the (depreciation) of the exchange rate does not go as far as threatening other goals of macroeconomic management ... We shall allow the exchange rate to depreciate."
INFLATION AND SOVEREIGN DEBT
Tumusiime-Mutebile said he expected core inflation to fall below 5 percent by the end of the fiscal year from 7.4 percent in December. He saw headline inflation of around 7 percent at the end of 2009/10 from 10.9 percent in December.
"The main reason for this is that the exchange rate has appreciated substantially since May 2009 and this has dampened the price rise for imports. Second, the weakness in consumer demand has also reduced inflationary pressures."
"The recent fall in core inflation gives the (central bank) some scope for short-term easing of monetary policy to support a recovery of aggregate demand," he said.
Asked what the central bank would do if core inflation began to increase, Tumusiime-Mutebile said: "We will tighten monetary policy. Definitely."
Uganda will move to inflation targeting in a year or two once data was frequent enough, he said.
"The current framework of quantitative money targets has served us well. We're not in a hurry to move toward inflation targeting."
The governor also said he expected yields on government paper to continue to go down. Yields have been coming off since mid-last year after shooting up on an outflow of offshore portfolio investors in late 2008 due to the global crisis.
"These interest rates will decline, but there will come a point at which they will have to bottom out ... I would expect interest rates to stay low for several quarters, say six months, before bottoming out," he said.
Tumusiime-Mutebile said he did not expect a decrease in interest from offshore investors -- which currently hold around 20 percent of Uganda's sovereign debt -- due to falling rates.
He said that the bank would continue to use repurchase agreements (repos) and reverse repos -- begun at the beginning of the fiscal year to manage volatility of short-term interest rates -- for the "foreseeable future". (Editing by Helen Nyambura-Mwaura & Kim Coghill)