At 0722 GMT, commercial banks in Kampala quoted the currency of east Africa’s third largest economy at 2,468/2,478, unchanged from Wednesday’s close.
The local currency has been stable since the Bank of Uganda (BoU) cut its key lending rate for a fourth time this year on Tuesday, despite broad market expectations for the shilling to depreciation following the policy easing.
Analysts say the shilling’s stability has been underpinned by a liquidity squeeze in the market after banks tied up large chunks of their shilling reserves in government securities ahead of the rate setting meeting.
“Tight liquidity has been keeping the shilling stable but BoU is doing a reverse repo today which will improve shilling supplies,” said Faisal Bukenya, head of market making at Barclays Bank.
“And I think this improvement in liquidity, combined with the policy, easing will start to weigh on market sentiment heavily and erode some value from the shilling,” he said.
The BoU cut its benchmark Central Bank Rate (CBR) to 19 percent from June’s 20 percent and said it was confident inflation would hit single digits by the end of the year.
Year-on-year headline inflation edged down for the fourth straight month in June to 18.0 percent from May’s 18.6 percent, slowed by falling food prices.
“We might end this week trading stable but I see the shilling retreating against the dollar in the weeks ahead as the easing cycle works its way around the financial system,” said Lucas Ochieng, head of treasury at Orient Bank.
Analysts expect the rate cut, the second in a row, to gradually dampen yields on government securities and possibly deter offshore investors whose dollars Uganda partly relies on to support the local currency.