The Bank of Uganda has raised its benchmark interest rate by 225 basis points to 12 percent, intensifying its fight against inflation as rising global oil prices, a weakening shilling and geopolitical tensions threaten to increase living costs and slow economic growth.
The decision, announced on October 14, raises the Central Bank Rate (CBR) from 9.75 percent and signals a shift towards tighter monetary conditions at a time when Uganda’s economic outlook is becoming increasingly uncertain.
The Monetary Policy Committee (MPC) said the move was necessary to contain inflationary pressures arising from external shocks, prevent further exchange-rate depreciation from feeding into domestic prices and keep inflation expectations anchored.
“The fuel shock seems persistent, and this, combined with exchange rate depreciation and effects of El Nino weather could cause inflation to be entrenched if monetary policy does not contain these price pressures now,” the Central Bank said in its October monetary policy statement.
The increase presents a difficult balancing act for policymakers because raising interest rates could help stabilise prices and support the shilling, but it could also increase borrowing costs for businesses and households, potentially weakening investment and consumption.
Fighting imported inflation
The immediate concern is the growing transmission of global economic shocks into Uganda’s domestic economy.
The escalation of conflict in the Middle East has disrupted shipping routes and energy infrastructure, pushing up international oil prices, freight charges and insurance costs.
At the same time, the shilling’s depreciation has made imported goods more expensive.
Because Uganda relies on imports for fuel, machinery and various manufactured products, a weaker currency increases the amount of shillings importers need to purchase foreign currency.
Businesses may then pass these additional costs on to consumers.
The effects are already emerging in inflation figures. Headline inflation rose to 4.6 percent in September from 4.1 percent in August, driven by higher food crop and fuel prices. Core inflation, which provides a measure of underlying price pressures, increased to 3.7 percent from 3.5 percent over the same period.
Although inflation remains below the medium-term target of 5 percent for core inflation, the Central Bank expects conditions to deteriorate.
It projects core inflation to average 5.5 percent to 6 percent and headline inflation 7 percent to 7.5 percent over the next 12 months.
That outlook marks a significant shift from the previous inflation environment, in which annual average headline and core inflation stood at 3.4 percent and 3.3 percent, respectively, in the 12 months to September.
The concern is that higher fuel and food prices could spread across the economy as businesses adjust prices and workers seek higher wages to compensate for declining purchasing power.
What higher rates mean for businesses
The CBR influences the cost of borrowing throughout the financial system.
When the central bank raises it, commercial banks may increase lending rates, depending on their funding costs, liquidity and competitive conditions.
For businesses, this could mean more expensive credit for financing inventory, purchasing machinery, expanding operations or meeting working-capital needs.
Some firms may postpone investment, while others could pass higher financing and operating costs on to consumers.
Households could also face more expensive borrowing where new loans or existing variable-rate facilities are affected.
Higher interest rates are intended to moderate demand and limit the ability of businesses to pass rising costs into prices.
They may also make shilling-denominated investments more attractive, depending on inflation expectations, currency movements and returns available elsewhere.
However, monetary tightening cannot directly reduce international oil prices or reverse disruptions to global shipping. Its purpose is to contain the domestic effects of those shocks before they become entrenched.
Shilling under pressure
The Central Bank’s decision also reflects deterioration in Uganda’s external position.
The current account deficit widened by $1.4 billion to $4.6 billion, according to the monetary policy statement.
The Central Bank attributed the deterioration to lower agricultural commodity prices, reduced tourism receipts and rising international costs.
In the 12 months to August 2026, the goods deficit increased to $2.8 billion from $2.4 billion a year earlier. The services deficit widened to $3.3 billion from $2.2 billion, largely because of higher freight charges.
A widening current account deficit can increase an economy’s need for foreign financing and put pressure on its currency when foreign-exchange inflows are insufficient.
Meanwhile, rising interest rates in advanced economies have made their financial markets relatively more attractive to investors.
This has limited capital inflows into Uganda, adding to depreciation pressures.
A weaker shilling makes imports more expensive, potentially increasing inflation and prompting further monetary tightening.
For businesses dependent on imported inputs, this creates a double squeeze: higher costs and potentially more expensive credit.
Growth forecast cut
The rate increase comes as the Bank lowers its growth expectations.
Economic growth is projected at 6.4 percent in the quarter ending September 2026, down from the 6.8 percent reported by the Uganda Bureau of Statistics for the quarter ending June.
For the 2026/27 financial year, the Bank revised its growth forecast to 6 percent to 6.5 percent from 7 percent to 7.5 percent, citing tighter financial conditions, exchange-rate depreciation, elevated energy prices and geopolitical uncertainty.
The downgrade highlights the cost of fighting inflation. More expensive credit can discourage investment and consumer spending, while higher fuel and transport costs squeeze business margins and household budgets.
The Bank nevertheless expects growth to strengthen to about 8 percent over the medium term, supported by private investment, stronger exports, anticipated oil-sector developments and the government’s Tenfold Growth Strategy.
That outlook will depend partly on whether global pressures ease and investment translates into productive economic activity.
Liquidity tightening
The Bank has also raised the Cash Reserve Requirement (CRR) to 13.5 percent from 11 percent, effective September 24.
The requirement determines the proportion of eligible commercial-bank deposits that must be held as reserves with the central bank. Raising it generally limits the funds banks can deploy for lending, although the effect depends on their liquidity positions.
Together, the higher reserve requirement and benchmark rate tighten financial conditions by affecting both the availability and cost of money.
The Bank set the rediscount rate at 15 percent and the bank rate at 16 percent, maintaining their respective margins above the CBR.
The MPC said it would continue assessing domestic and global developments and take further measures if necessary.
The central challenge is whether tighter monetary policy can contain imported inflation without significantly undermining economic growth.
If oil prices remain elevated and the shilling continues weakening, inflation could prove more persistent.
But if external pressures ease and food supplies improve, the economic cost of tightening could become more pronounced.
For now, the Bank has chosen to act before inflationary pressures become entrenched, signalling that price stability takes priority even as businesses and households face a more difficult economic environment.