By Elias Biryabarema KAMPALA (Reuters) - The Uganda shilling weakened on Monday, pressured by dollar demand in the interbank market, but traders said the local currency may recover ahead of a Treasury bill auction on Wednesday. A tight monetary policy has helped the currency of one of Africa's leading coffee producers to recover 15 percent since its all-time record low of 2,901 hit on September 23. At 0845 GMT, commercial banks in Kampala quoted the shilling at 2,460/2,470 against Friday's close of 2,450/2,460. "Demand in the interbank market has shaved some value off the shilling," said Faisal Bukenya, head of market making at Barclays Bank Uganda. "Going into this week, offshore participation in the auction and greenback demand from sectors like energy which is picking up as the pace of business activity accelerates will offer market direction." Bukenya said the shilling was likely to oscillate in the 2,450-2,500 range. Bank of Uganda (BoU) is on Wednesday scheduled to sell 95 billion shillings worth of Treasury bills and some traders expect heavy participation from offshore investors keen to benefit from the relatively high yields. Although the central bank credits its policy tightening for the shilling's pullback from its record low, it decided to leave its key lending rate this month at 23 percent, unchanged from December. The decision followed release of data that showed inflation slowed year-on-year in December to 27 percent from November's 29 percent. Analysts forecast inflation, which peaked at an 18-year high of 30.4 percent in October, will continue on a downward trend this year. "We wait to see whether the Treasury Bills auction this week will attract any offshore interest which should give the shilling some strength," said a market report from KCB Uganda.

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