KAMPALA: The Ugandan shilling was unchanged on Friday, a day after the central bank cut its key lending rate, but traders said the local currency is likely to weaken in coming months as cheaper credit starts to flow into the economy.
At 1146 GMT commercial banks quoted the currency of east Africa's third-largest economy at 2,485/2,495, unchanged from Thursday's close.
Bank of Uganda cut its benchmark interest rate to 17 percent for this month from 19 percent previously, saying it needed to lower borrowing costs to accelerate economic growth.
"We think the shilling will weaken in the next few weeks," said Ahmed Kalule, trader at Bank of Africa.
"What's keeping it stable for now is that demand is still sluggish because cheaper funds have not yet started flowing through the real economy. It needs time."
Analysts say the rate cut, which followed a sharp drop in inflation last month, will spur a drop in yields on Uganda's Treasury bills and bonds and crimp the appetite of offshore investors.
Uganda partly relies on dollar inflows from offshore investors in its public debt to prop up its currency.
Next week the central bank will sell Treasury bills of various maturities worth a total 75 billion shillings ($30 million). Fixed-income traders said the sale was unlikely to draw large offshore investor participation in the wake of the rate cut.
"Although we expect shilling depreciation it will take time because credit flow, which is key to pushing up dollar demand, will not jump suddenly but increase gradually," said Faisal Bukenya, head of market making at Barclays Bank.
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