Bank of Uganda (BoU) cut its benchmark Central Bank Rate (CBR) by 2 percentage points to 17 percent, saying last month's steep fall in inflation had indicated price pressures would cool faster than previously thought.

At 1143 GMT commercial banks quoted the shilling at 2,483/2,493, weaker than Wednesday's close of 2,478/2,488.

The currency of Africa's biggest coffee exporter weakened as much as 2,485/2,495 after the rate decision before it self-corrected.

"The shilling will certainly be under pressure because with this sharp fall in CBR we'll see more banks resume lending to importers," said Faisal Bukenya, head of market making at Barclays Bank.

Although BoU also cut CBR in June and July the shilling has remained largely stable, in part supported by weak corporate demand.

On Friday BoU governor, Emmanuel Tumusiime-Mutebile said the economy had continued to perform below its potential and that it was necessary to stimulate a recovery of commercial lending to the private sector.

Benoni Okwenje, a trader at Stanbic Bank said falling inflation had allowed BoU to shift its focus from high prices to stimulating growth but that pro-growth measures would inevitably weaken the shilling.

"It's a tough balancing act for BoU because while they have to cut CBR (rates) to stimulate growth, interest rates on Ugandan debt will decline which will hurt the shilling," he said.

A fall in yields on Ugandan Treasury securities is likely to choke off foreign investor interest in Treasury bills and bonds, cutting off a key source of dollar supplies.

He said about 20 percent of Uganda debt was held by foreign investors and that if the big rate cut sparks their exit it will put the shilling on the ropes.