KAMPALA (Reuters) - The Ugandan shilling slipped on Wednesday as corporate demand for dollars picked up, although the central bank's announcement of a new inflation target and benchmark rate may lend some support, traders said.
The Bank of Uganda launched an inaugural benchmark lending rate of 13 percent and a 5 percent core inflation target on Wednesday in a bid to tame price pressures that pushed inflation to a 17-year high in May.
"Ideally, the shilling should strengthen a bit. This is a key indicator for it to go up, but we would wait and see reactions from offshore people in the market," said Robert Aloo, a trader at Kenya Commercial Bank.
"If they see that rates will continue going up then we might see a positive impact on the shilling. But people will keep looking at real return and if inflation will erode their investments," he said.
At 1000 GMT, commercial banks in the capital Kampala quoted the shilling at 2,560/70 to the dollar, weaker than Tuesday's close of 2,535/45.
"Shillings are short in the market right now after the central bank came in with several repos," said Kamal Shahzad, a trader at Crane Bank. "This could be a good move eventually once the market stabilises and there are good inflows in the market."
"At the moment the dollar rate is quite high, but once it stabilises to about the 2,400 level then we could see some real effects and the inflation rate coming down," he said.
Traders said a strike by shop owners in the capital over the fallout from the weak currency and inflation was unlikely to have much impact, unless it persisted. Uganda was rocked by deadly protests over inflation in April.
"It's weakened today because the corporates are buying up dollars," Faisal Bukenya, head of market making at Barclays Bank Uganda, said. "The strike could have an impact if it continues but I don't see it moving the currency today."
The shilling slipped to a record low of 2,710 against the dollar last week on strong dollar demand from the oil sector, speculative trading and panic buying before the central bank stepped in and sold dollars to prop it up.
