A fall in inflation in east Africa's third-largest economy last month, the sixth in a row, is expected to give the Bank of Uganda (BoU) room to extend its monetary policy easing cycle.

Analysts say such a decision would further dampen yields on Ugandan debt and prompt a further upsurge in dollar demand as more offshore investors exit.

At 0844 GMT commercial banks quoted the shilling at 2,505/2,515, unchanged from Friday's close.

"The shilling is clearly vulnerable to losses although it's tenuously holding onto its ground now," said Faisal Bukenya, head of market making at Barclays Bank.

"We do anticipate it to give up some ground ahead of the rate decision. Since players expect some easing they'll be seeking to build their dollar positions."

After trading steady at around 2,480 for more than three months, the shilling suddenly weakened sharply about two weeks ago on market fears of an impending rate cut, prompting the central bank to intervene to halt losses.

The BoU says it is keen to reduce key rates to accelerate the flow of cheap credit and jumpstart sluggish economic growth. The central bank cut the interest rate by 200 basis points last month to 17 percent.

Analysts say the shilling will likely be hit in the medium term as liquidity grows and consumer spending recovers but is unlikely to be severely affected as the market has already priced in a rate cut.

"We'll probably see a bit of depreciation for the shilling but I think it has already absorbed the shock because the market has already priced in the expected rate cut," said Peter Mboowa, trader at KCB Uganda.